DIAGEO’S FIRST HALF SAVED BY NORTH AMERICA
Diageo delivered its first half results today, reporting first half organic sales growth of 6% and operating profit up 8%. In all, the results were mixed as U.S. and International sales plunged upwards, while Europe remained quite a bit weaker. But since the U.S. and North America is our main concern at WSD, things were looking pretty good from our end.
Paul Walsh (chief of Diageo) said, “North America was created to outperform a growing market, and it’s exactly what we’re doing. Our core strengths are superior route to market, our brands, and the level and quality of our marketing.”
Despite differing results, Diageo raised its full year guidance from 7% organic operating profit to 8% growth. However, the company reported that it does not expect any significant changes in the second half.
The group was bolstered by strong sales of spirits, in particular from Johnnie Walker, where North American sales rose by 8% overall. Spirits volume in North America grew 3% for the first half. Increase demand for Baileys, Smirnoff and Johnnie Walker, along with a price increase for Captain Morgan, played a big hand in the growth.
Paul told analysts that the company plans to increase marketing spend on Johnnie Walker by 25% as a part of its increased “focus on premium brands and our ability to deliver top-line price and mix benefits.”
Spirits overall sales grew 2% driven by Smirnoff and Johnnie Walker which grew 6%.
“Both strong brands that have benefited from our effective advertising campaigns,” said Nick Rose, CFO.
He continued:
“Focus on premium brands and superior route to market in the U.S. delivered strong topline growth. Volume and sales growth in the U.S. was driven by priority brands and our August price increases on Johnnie Walker, Guinness, Baileys, Captain Morgan, and Crown Royal.”
Spirits gained strong momentum in the U.S. with volume rising 3% and sales up 5%. The company attributed the growth to an increase in consumer confidence; growth in the legal drinking age population; changing demographics; and the growing level of acceptance of spirits in the alcohol beverage category. The company also confirmed that major changes to the distribution network in the U.S. are now over.
All the priority brands in the U.S. gained share expect for Jose Cuervo. As Diageo said, its share of tequila has declined in the U.S. because the company refused to lower prices to match its competitors.
Commenting on the U.S. spirits market, Paul stated that “we may have lost half a point of momentum volume in the category, but let’s be clear, this is still a very attractive category. The structural dynamics here will continue to favor spirits and imported beer. I don’t see any fundamental shift in that market taking place.”
Net sales were up 9% in the U.S., although ready-to-drink products were down overall 4%. Nick stated that while Smirnoff RTDs were down 13% due to competition and declines in the category, strong growth in other RTD products, like Cuervo Margaritas, offset Smirnoff.
“We do expect to continue the downward trend in RTDs, maybe not quite at this level, but we do expect it to follow.”
Wine sales grew 6% for North America. California wine brands, led by Sterling, had another good half where net sales were up 11%, said Nick.
Hurricanes in the U.S. at the half had adverse impact on trading, bringing net sales and operating profit down as a consequence, said the company.
When asked about past problems with the Allied sales force, Paul Walsh stated, “We have not seen anything materially different in the way the brands have been promoted or marketed than before. We think the industry overall will benefit from having a strong second half.”
One account Diageo is looking to for help? Wal-Mart.
“We’re already are seeing very good performance with Wal-Mart in the U.S. as their appetite has increased around the share of spirits. Currently, we do enjoy category captainship in the account, and we expect to perform even better,” said Paul.
"We do see Wal-mart as a positive and we do think it will drive incrementability because it will simply improve the accessibility to consumers. Couple that with our market share, and yes, we expect it to be very positive.”
Repeatedly during the conference, Diageo management attributed growth in the U.S. to innovation. When asked to specify what the innovation actually entails, Diageo North America president Ivan Menezes stated:
“Innovation is broad based across spirits, RTD and beer, where $70M of revenue will be used on innovations in North America. This will include driving more premiumization in spirits, such as Oronoco premium rum. There will also be a couple of new products and extensions in the RTD sector to drive business.”
However, Ivan declined to comment on specific upcoming product launches in North America during the second half.
Paul Walsh (chief of Diageo) said, “North America was created to outperform a growing market, and it’s exactly what we’re doing. Our core strengths are superior route to market, our brands, and the level and quality of our marketing.”
Despite differing results, Diageo raised its full year guidance from 7% organic operating profit to 8% growth. However, the company reported that it does not expect any significant changes in the second half.
The group was bolstered by strong sales of spirits, in particular from Johnnie Walker, where North American sales rose by 8% overall. Spirits volume in North America grew 3% for the first half. Increase demand for Baileys, Smirnoff and Johnnie Walker, along with a price increase for Captain Morgan, played a big hand in the growth.
Paul told analysts that the company plans to increase marketing spend on Johnnie Walker by 25% as a part of its increased “focus on premium brands and our ability to deliver top-line price and mix benefits.”
Spirits overall sales grew 2% driven by Smirnoff and Johnnie Walker which grew 6%.
“Both strong brands that have benefited from our effective advertising campaigns,” said Nick Rose, CFO.
He continued:
“Focus on premium brands and superior route to market in the U.S. delivered strong topline growth. Volume and sales growth in the U.S. was driven by priority brands and our August price increases on Johnnie Walker, Guinness, Baileys, Captain Morgan, and Crown Royal.”
Spirits gained strong momentum in the U.S. with volume rising 3% and sales up 5%. The company attributed the growth to an increase in consumer confidence; growth in the legal drinking age population; changing demographics; and the growing level of acceptance of spirits in the alcohol beverage category. The company also confirmed that major changes to the distribution network in the U.S. are now over.
All the priority brands in the U.S. gained share expect for Jose Cuervo. As Diageo said, its share of tequila has declined in the U.S. because the company refused to lower prices to match its competitors.
Commenting on the U.S. spirits market, Paul stated that “we may have lost half a point of momentum volume in the category, but let’s be clear, this is still a very attractive category. The structural dynamics here will continue to favor spirits and imported beer. I don’t see any fundamental shift in that market taking place.”
Net sales were up 9% in the U.S., although ready-to-drink products were down overall 4%. Nick stated that while Smirnoff RTDs were down 13% due to competition and declines in the category, strong growth in other RTD products, like Cuervo Margaritas, offset Smirnoff.
“We do expect to continue the downward trend in RTDs, maybe not quite at this level, but we do expect it to follow.”
Wine sales grew 6% for North America. California wine brands, led by Sterling, had another good half where net sales were up 11%, said Nick.
Hurricanes in the U.S. at the half had adverse impact on trading, bringing net sales and operating profit down as a consequence, said the company.
When asked about past problems with the Allied sales force, Paul Walsh stated, “We have not seen anything materially different in the way the brands have been promoted or marketed than before. We think the industry overall will benefit from having a strong second half.”
One account Diageo is looking to for help? Wal-Mart.
“We’re already are seeing very good performance with Wal-Mart in the U.S. as their appetite has increased around the share of spirits. Currently, we do enjoy category captainship in the account, and we expect to perform even better,” said Paul.
"We do see Wal-mart as a positive and we do think it will drive incrementability because it will simply improve the accessibility to consumers. Couple that with our market share, and yes, we expect it to be very positive.”
Repeatedly during the conference, Diageo management attributed growth in the U.S. to innovation. When asked to specify what the innovation actually entails, Diageo North America president Ivan Menezes stated:
“Innovation is broad based across spirits, RTD and beer, where $70M of revenue will be used on innovations in North America. This will include driving more premiumization in spirits, such as Oronoco premium rum. There will also be a couple of new products and extensions in the RTD sector to drive business.”
However, Ivan declined to comment on specific upcoming product launches in North America during the second half.
posted at 12:33 PM
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