Sales results too high, spirits prices too low and who’s up for leading Diageo next? – The Just Drinks analyst

Getting used to faster sales growth One thing that has struck me in the reporting season so far is how bullish some of the company revenue targets are for 2022. We had PepsiCo come out with a 6% guidance, only to be beaten shortly afterwards by The Coca-Cola Co at 7%-to-8%. This was then closely matched by the largest Coke bottler, Coca-Cola Europacific Partners, at 6%-to-8%. There is still an element of COVID recovery in these numbers, with the out-of-home channels expected to normalise during the year. Even so, these look like upbeat numbers when investors have got used to consumer companies usually delivering revenue growth in the 3%-to-5% range over many years. There have been a few hints of caution. In its full-year results last week, Heineken didn't give a revenue target but flagged that higher prices might be offset by lower volumes as consumers step back. This hints at the new driver that's helping some of these targets, ie inflation. I've previously flagged some of the likely downsides from inflation for beverage brand owners' results, such as higher input costs, which might put a squeeze on margins. This is a factor that was very visible in Unilever's guidance, for example, which forecast a major margin correction in 2022 as a result. Elsewhere, in results so far, margins appear to be broadly flat-lining. The message appears to be that higher input costs are being offset by higher prices, generally. I suspect that investors are yet to get used to the fact that higher inflation will often lead to higher overall sales growth. This will require a mindset change, from expecting a norm of 3%-to-5% per year to something bigger; it also creates a problem if one company is talking about 2022 growth when the higher prices might be visible, and, say, a five-year view, when it might expect to be averaged down a bit. Nevertheless, I think we'll see investor expectations rising towards at least 'mid-single digits' as the norm for medium-term growth. Of course, we still have the ongoing debate in the investment community about which brands have real pricing power and which don't. From the evidence so far, Coke and Pepsi look more confident than Heineken. Is pricing too low for spirits? I recently had lunch with an ex-analyst who has followed the industry for even longer than I have! He has quite the theory on spirits. Their pricing is too cheap! It's fair to say that he also has a strong interest in luxury goods - an industry you couldn't really criticise for low-ball pricing. Not surprisingly, he sees some of the Cognac brand owners, such as LVMH or Remy Cointreau, as the yardstick for value creation in the spirits industry: Keep a high price and an air of exclusivity. The problem is that most quoted spirits companies are viewed by investors as being part of the 'consumer goods sector', alongside beer, soft drinks, food and household products. Success tends to be measured by growth in a combination of price, mix and volume, with the most emphasis on the latter. It's not surprising, then, that a company like Diageo, which mainly plays in middle-market spirits, (I know they call it premium, but I think that's misleading), is focused on selling more than selling better. I know you can point to the most recent results from Diageo, where, from a 20% jump in six-month sales, over half (11%) related to price and mix. But, these are 'funny numbers', heavily influenced by the COVID bounceback. I think my former colleague is right when he worries about the heavy line and flavour extensions that we've seen in recent years, initially in vodka but now in many categories. Surely this is about milking brand equity rather than building it? Let’s be honest: In the on-premise - a vital channel for spirits - the consumer is relatively insensitive to price. Maybe they should be paying a bit more for the product? And curiously, the higher inflation world that we're moving into offers a good opportunity for spirits companies to rebase some price points upwards. Who will be Diageo's next CEO? It doesn't seem that long ago that I was assessing how Ivan Menezes would fare as the new CEO of Diageo. As far as investors are concerned, the answer is very well, with a share price that has more than doubled in the eight-and-a-half years he's been in charge. The average tenure of a CEO in the UK is only around five years and even though it tends to be longer for beverage companies, I'm hearing a bit of speculation about who takes over from Ivan when he retires. From what I'm led to believe, the betting on an internal candidate appears to have moved to the relatively-new head of North America, Debra Crew, who made the slightly curious move from a non-executive position to executive 18 months ago. There are a few other long-time members of the executive committee who may fancy their chances, such as John Kennedy who heads up operations in Europe. However, I saw that Sam Fischer, Diageo's president of Asia Pacific & Global Travel, ruled himself out this month by moving to pastures new, with a jump to become CEO of Lion. I don't profess to have any inside information here. But, after the terrific share price performance under Ivan, I'd warn that these will be big boots to be stepping into.