Diageo (DEO)

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See all Bulls Reasons Bulls: Reasons To Buy Strong international growth and the price is right 100% agree Strong international growth and the price is right DEO has had considerable success internationally, with growth rates of 20% and 16% for profits and revenue respectively. Investors were very satisfied with the quarter and the guidance, sending shares up 4% on the day. The company is by far the world leader in alcohol and this is... read more View or Edit Reason 1 votes 100% agree Alcohol sells even in economic downturns 0% agree Alcohol sells even in economic downturns The fact of the matter is, alcohol sells despite economic downturns or slowdowns. When it comes to safe havens, the gurus of investing always talk about the consumer stocks that will never go away, but alcohol is and has proven once again it is one of the strongest selling consumables on the planet. View or Edit Reason 0 votes 0% agree See all Bears Reasons Bears: Reasons To Sell Transportation/Distribution costs will bite into margins 0% agree Transportation/Distribution costs will bite into margins With increasing fuel costs, margins will suffer. The true questions are whether competition will permit price increases and will sales volumes weather price increases? View or Edit Reason 0 votes 0% agree Send the authors a comment or suggestion Be the first to make a suggestion See All Suggestions

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Diageo is the largest alcoholic beverage producer and marketer in the world. Diageo sells a collection of premium alcohol brands in the spirits, wine and beer categories. Some well known brands in the Diageo portfolio include Smirnoff, Guinness, Johnnie Walker, Baileys, JeB, José Cuervo, Captain Morgan and Tanqueray, and Beaulieu Vineyard and Sterling Vineyards wines.^[1] The company generated $20.4 billion in revenue in 2007.^[2]

Diageo does the majority of its business in the developed Western world. North America and Europe have always been Diageo's largest market, but they are stagnant markets. Western Europeans and Americans are consuming less alcohol than they have traditionally. Consumption in the United States decreased 27% from 1980 to 2000.^[3] Revenue in North America dropped 1.5% last year and dropped 1.2% in Europe.^[4] Diageo is now looking at Asia, Africa, and Latin America for growth. They are smaller markets but they are growing at a much faster pace than the west. In many developing countries, like China and India, the middle and upper class is growing, which translates to more customers for Diageo. In addition, Diageo is spending lots of advertising money in these countries promoting their premium brands.

[edit] Business Financials

For the fiscal year ended June 2007, Diageo recognized revenue of 10.3 billion GBP, and generated 2.06 billion GPB in income, which translates to year over year growth of 2.6% and 6.3% respectively.^[5] In 2007, Diageo sold 114 million units of spirits (one unit equals a nine liter case), 24 million units of beer, 3 million units of wine, and 7.5 million units of ready-to-drink beverages.^[6]

^[7]

Diageo operates in four geographic regions:

• North America: North America is Diageo's largest sector with profits of $1.9 Billion in the second half of the last fiscal year and reiterated full year guidance despite what is seen as uneven economic conditions in the U.S. The numbers overall represented 9% growth and guidance which kept the company on pace for a further 9% in organic growth throughout 2008. Sales were up over 6% to $8.4Billion. North American results spoke for themselves: 8% growth on strong sales of Johnnie Walker, Smirnoff and Captain Morgan. Despite the weakening US economy, Diageo put the pedal to the metal in advertising, increasing spending in that area. This clearly worked, creating far more brand awareness than in previous periods. Diageo is also trying to expand its line-up of liquor offerings, after deciding not to go after Absolut Vodka, the company purchased a 50% stake in Ketel Vodka.^[8]. Previous year's sales were reported as 2.47 billion GBP and operating profit of 850 million GBP. For the fiscal year ended June 2007, sales in North America decreased 1.5%, but profits rose 2.5%.^[9]

• Europe: Europe is Diageo's second largest sector. Diageo generated 2.43 billion GBP in revenue in 2007, and operating profit of 723 million GBP. Sales decreased 1.2% and operating profit dropped 1.9% in 2007.^[10]
• Asia Pacific: Asia Pacific is Diageo's smallest sector. In 2007, sales totaled 840 million GBP and operating profit was 196 million GBP. Sales rose 10.1%, but operating profit fell 1.5%.^[11]
• International: The International sector contains all the other countries that Diageo operates in, including those in Africa and Latin America. Sales totaled 1.67 billion GBP in 2007, and operating profit was 499 million GBP. In 2007, sales rose 14.5% and operating profit rose 12.1%.^[12]

^[13]

[edit] Trends and Forces

• Slowing Alcohol Consumption in the West: Western European and North Americans are consuming less alcohol than they have previously. In America, consumption has been slowing for decades, from 2.76 gallons in 1980, to 2.43 gallons in 1990, and finally 2.18 gallons in 2000.^[14] From 1970-2000 consumption in Italy dropped 44%, France dropped 34%, and Spain by 15%.^[15] From 1990 to 1998 alcohol consumption declined 6% in Western Europe, 10% in North America and 12.5% in Australasia.^[16]

• Stagnant Spirits Market, Looking Elsewhere for Growth: The main focus of Diageo's business is on the spirits sector of the market. However, this market has started to decline, and growth in the alcohol business has come from wine and beer. Also, flavored alcohol, vodka in particular, and ready-to-drink beverage's like Diageo's Smirnoff Ice also present growth opportunities. Diageo recognizes this trend, and has made a concerted effort to diversify out of simple, traditional spirits. In addition, while the Western world still presents a great value, growth looks to come from the developing world and emerging markets

• United States Demographic Trends: The United States is Diageo's largest market. The majority of alcohol drinkers in America are part of the baby boomer generation. This generation is reaching their peak alcohol drinking age, and have plenty of disposable income. It is believed that the baby boomer trend will continue until around 2015, and will continue to generate profits for the alcohol industry.^[17] However, this good news is tempered by some less encouraging data concerning the youngest generation of Americans. The next generation of alcohol drinkers appears to hold off on alcohol more than their parents. The number of teenagers who said they had had a drink was 78% lower in 1999 than in 1982, and the number of college freshmen who say they drink occasionally or often is at record low levels.^[18]

• Premium vs. Discount Alcohol: The vast majority of brands in the Diageo portfolio are considered "premium" brands, and they generally cost more than a typical bottle of alcohol. These more expensive bottles generally carry higher margins than their discount competitors, and have been a great business for Diageo. However, if the economy were to weaken significantly, and disposable incomes dropped, Diageo could be put under some pressure. A normal consumer on a tight budget, will probably substitute a cheaper bottle of alcohol for the more expensive, brand name Diageo product.

[edit] Competition

The largest players in the alcohol business are mainly conglomerates that produce and compete in all areas of the business (wine, spirits, and beer). In the wine business, Diageo competes with many small wine producers like Willamette Valley Vineyards, as well as larger players like LVMH Moet Hennessy and Constellation Brands. In the beer business, Diageo competes with Anheuser-Busch Companies, Molson Coors Brewing Company, and SABMiller, and, in America, Constellation Brands as well. Finally, a few competitors in the spirits sector include Constellation again, LVMH Moet Hennessy L.V., Brown-Forman (BF) and Fortune Brands.

 Diageo

	Select All  |  Select None Metrics Revenue by Geography - Europe Revenue by Geography - Asia Revenue by Geography - Africa Revenue by Geography- Latin America Revenue Revenue by Geography- United States Revenue by Geography - International Net Income Operating Income Gross Profit Cases Sold Net Sales per Case Gross Profit per Case Selling Expense per Case Total Cases of Hard Liquor Total Cases of Wine Cancel

	Select All  |  Select None Companies Willamette Valley Vineyards (WVVI) Constellation Brands (STZ) Castle Brands (ROX) Central European Distribution (CEDC) Diageo (DEO) Cancel

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Company	Data From	Operating Income	Gross Profit	Cases Sold	Net Sales per Case	Gross Profit per Case	Selling Expense per Case	Total Cases of Hard Liquor	Revenue	Total Cases of Wine	Revenue by Geography- United States	Revenue by Geography - International	Net Income
Castle Brands (ROX)	2008	($29.5M)[19]	$6.51M[19]	313M[19]	$87.2[19]	$20.8[19]	$57[19]	Add	$27.3M[19]	Add	$18.5M[20]	$8.86M[20]	($27.6M)[19]
Central European Distribution (CEDC)	2007	$118M[21]	$249M[21]	9.3M[22]	$128[21]	$26.7[21]	$14.1[21]	Add	$1.19B[21]	Add	$7.09M[23]	$1.18B[23]	$77.1M[21]
Constellation Brands (STZ)	2008	($357M)[24]	$1.28B[24]	Add	Add	Add	Add	Add	$3.77B[24]	Add	$2.03B[25]	$1.74B[25]	($613M)[24]
Diageo (DEO)	2008	$2.23B[26]	$4.85B[26]	Add	Add	Add	Add	Add	$10.6B[26]	Add	$2.97B[27]	$7.68B[27]	$1.6B[26]
Willamette Valley Vineyards (WVVI)	2007	$2.73M[28]	$8.28M[28]	153K[29]	$109[28]	$54.1[28]	$36.3[28]	Add	$16.7M[28]	153K[29]	$16.7M[28]	Add	$1.69M[28]

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[edit] References

1. ↑ "Our Brands"
2. ↑ Using conversion of 1.98 USD per GBP. Diageo Annual Report
3. ↑ “Alcoholic Beverage Consumption in the U.S.: Patterns and Trends”
4. ↑ DEO Annual Report pg. 35
5. ↑ DEO Annual Report pg. 2
6. ↑ DEO Annual Report pg. 8-9
7. ↑ Google Finance, DEO Income Statement
8. ↑ Diageo increases brand awareness and sales, proves alcohol sells despite economy
9. ↑ DEO Annual Report pg. 35
10. ↑ DEO Annual Report pg. 35
11. ↑ DEO Annual Report pg. 35
12. ↑ DEO Annual Report pg. 35
13. ↑ DEO Annual Report pg. 13-16
14. ↑ “Alcoholic Beverage Consumption in the U.S.: Patterns and Trends”
15. ↑ World Consumption Trends
16. ↑ World Consumption Trends
17. ↑ World Consumption Trends
18. ↑ World Consumption Trends
19. ↑ ^{19.0 19.1 19.2 19.3 19.4 19.5 19.6 19.7} ROX,2008,10-k,Item 6,Pg 28
20. ↑ ^{20.0 20.1} ROX,2008,10-k,Item 8,Pg 84
21. ↑ ^{21.0 21.1 21.2 21.3 21.4 21.5 21.6} CEDC,2007,10-k,Item 6,Pg 25
22. ↑ CEDC,2007,10-k,Item 1,Pg 2
23. ↑ ^{23.0 23.1} CEDC,2007,10-k,Item 8,Pg 73
24. ↑ ^{24.0 24.1 24.2 24.3} STZ,2008,10-k,Item 6,Pg 26
25. ↑ ^{25.0 25.1} STZ,2008,10-k,Item 8,Pg 128
26. ↑ ^{26.0 26.1 26.2 26.3} DEO,2008,20-F,Pg 118
27. ↑ ^{27.0 27.1} DEO,2008,20-F,Pg 130
28. ↑ ^{28.0 28.1 28.2 28.3 28.4 28.5 28.6 28.7} WVVI,2007,10ksb,Item 7,Pg 24
29. ↑ ^{29.0 29.1} WVVI,2007,10ksb,Item 6,Pg 14