Diageo Solid in 2008
Diageo presented a solid fiscal year in 2008 where growth was led by North American and International markets. However, 2009 could bring heightened concerns on the economy and rising raw material costs.
Improving price/mix continues to be the company’s main focus by stressing value over volume. Diageo continued its strategy of focusing on the premium and super-premium brands in North America. As a result, the company saw strong performance in those brands which continued to drive growth in fiscal 2008, while value brands such as Gordon’s experienced weakness. The majority of the priority spirits, wine and beer brands gained share.
Price increases on 40% of spirits volume in the US drove net sales growth despite negative mix within the global priority brands due to the strong growth of Smirnoff and Captain Morgan.
Loss of share in the value brands resulted in overall share of US spirits being broadly maintained during the year at 28.3 percentage points, with share of priority spirits brands up 0.3 percentage points.
Volume was up 2% and net sales grew 5%. Net sales of spirits grew 7%, beer increased 6% and wine was up 12%, which was partially offset by a -10% decrease in net sales of ready to drink.
ECONOMIC AND COST PRESSURES. Price increases and premiumizing brands through marketing helped battle tougher cost pressures from energy, packaging and barley. With that said, Diageo tweaked guidance from 9% to between 7 and 9% for organic operating profit growth for fiscal 2009. The reduction was put in place because of rising input costs and broader economic conditions.
“We’ve seen a 3% increase in costs this year...forecasting expects costs to increase next year across the items we are reliant on, such as grain and packaging,” said Diageo ceo Paul Walsh.
"[The rise in costs] could be even worse. There is no sign of these cost pressures abating," said cfo Nick Rose.
For the first time in a few years, however, Diageo is expecting a positive impact from the exchange rate in fiscal 2009 at about 60 million pounds.
The biggest challenge right now, said Walsh, is the current global economic environment.
Nonetheless, he said Diageo has entered the new fiscal year even stronger, driven by global diversity, strong brands across category, good routes to market, excellent marketing and deep consumer understanding. He said the company is also building strong relationships with customers.
On of the biggest economic effects in the U.S. is the consumer shift from the on-premise to the off-premise. As a result, Diageo is “helping consumers build their confidence to make the perfect cocktail at home that they drink at the bar.” The company said “successful” off-premise campaigns have helped increase off-premise sales in Smirnoff and Captain Morgan.
Common sense would suggest that the value category would actually perform better during slow economic times. However, Walsh said there is always a group of consumers that want to drink expensive alcoholic beverages despite economic pressure.
“Whether you agree with the social justice of this or not, there is still a nucleus of consumers around the world...that have the means and desire to consume the best. That isn’t going to change. The current economic situation will not impact that...they’ve got the money and they want the best.”
He also said people are not drinking more but they’re drinking better.
He called premium and super-premium brands an “affordable indulgence” that gives consumers “status at a very affordable price.”
ACQUISITIONS AND DIVESTMENTS. When asked if Diageo would consider selling some of its value brands, the president of Diageo North America, Ivan Menezes, said the company is happy with its current portfolio and there are no divestment plans.
He pointed out that the value brands are a very small proportion of Diageo’s profitability, and that at the moment “we have a good position across price points. We feel very comfortable that the center of gravity is at premium and premium plus categories.”
Value brands allows Diageo to “maximize value and gives us the position we want with distributors and retailers to grow our categories and continued premiumization trends in U.S.”
During the year Diageo added Ketel One, Zacapa rum and Rosenblum Cellars, which were “already successful brands and we intend to build on that success,” said Walsh.
Also, the company “continues to look at innovative ways to bring new brands to Diageo,” whether it be partnerships or acquisitions.
A CLOSER LOOK AT BRANDS. Smirnoff, Johnnie Walker, Captain Morgan, Crown Royal, Guinness, Sterling Vineyards and Chalone wines were again the performance leaders in North America. Price increases and strong growth of the reserve brands Cîroc, Don Julio and Johnnie Walker Blue Label drove net sales growth. Marketing excluding ready to drink was up 5% with strong investment behind the reserve brands.
The key driver of growth for Captain Morgan was its performance in North America. The brand grew 7% in volume and net sales were up 12% driven by Captain Morgan Original Spiced rum, which gained a further 0.6 percentage points of share despite the launch of two competitor brands in the rum category.
Meanwhile, Jose Cuervo’s performance continued to be affected by the growth of the ultra premium tequila segment in North America. Volumes of Cuervo were down -5% and net sales dropped -4% in the fiscal year. To help reposition the brand in an increasingly premiumized category, Diageo released Jose Cuervo Platino in the first half of 2008 to good consumer response, said the company.
Tanqueray outperformed the declining gin category in North America, gaining 1.6 percentage points of share driven by the continued growth of Tanqueray Rangpur. A price increase on the core brand drove price/mix improvement.
Crown Royal took share in North America and net sales grew benefiting from price increases and successful innovations. Volumes were up 5% and price increases drove net sales up 9%. Crown Royal continued to take share in the North American whiskey category, up 0.4 percentage points.
Smirnoff continued its strong performance from the first half and grew volume 8%. Price increases were taken in key markets, driving net sales growth of 12% and share up 0.2 percentage points.
Johnnie Walker also grew ahead of the category with volume up 5% and net sales up 10% driven by Johnnie Walker Black Label and the super deluxe labels, leading to share growth of 1.2 percentage points. Price increases were taken across the Johnnie Walker range.
The Baileys results were constrained by lower volume in Baileys flavors, which lapped the launch in fiscal 2007. Overall, volumes of Baileys were down -6% and net sales fell -3%. Baileys Original Irish Cream outperformed the category with volume up 3% and net sales up 7% as price increases were taken across most of its markets.
Local priority wines grew volume 6% and net sales were up 8% driven by strong performance of Sterling Vineyards and Chalone and price/mix improvement in Beaulieu Vineyards.
ANHEUSER-BUSCH INBEV. Walsh said he’s not “overly concerned” about Anheuser-Busch InBev.
“We’ll have to sit and wait...I’m not unduly worried about any attack on the spirits category. That said, we respect all our competitors and we will have people as we speak to propel further the market share gains in the US and accelerate spirits category growth. I don’t take anything for granted but I’m not overly concerned.”
JACK DANIEL’S FLAT IN Q1
Volumes of Jack Daniel’s were flat in the U.S. during the first quarter, where global depletions declined -1%. Net sales increased in the low single digits on a constant currency basis.
“Jack Daniel’s US volume trends weakened in 1Q, as depletions were flat following a low single digit increase during 4Q,” said UBS analyst Kaumil Gajrawala. “That said, BFB mentioned volume trends improved in July, driven by increases in promotional activity.”
Gentleman Jack net sales increased by double digits on both a reported and a constant currency basis for the period. Jack Daniel’s Single Barrel delivered solid net sales growth, said the company.
Finlandia net sales also increased by double digits, which reflects higher volumes and pricing gains. Global depletions grew in the high single digits.
Southern Comfort net sales declined in the mid-single digits during the quarter. Volume declines, due in part to softness of the on-premise channel in the brand’s major markets, were offset partially by price increases.
“It is unlikely that SoCo trends improve near-term as we expect on-premise to remain weak,” said Kaumil.
Net sales for Sonoma-Cutrer, Bonterra, Chambord, Tuaca, and Woodford Reserve grew at double-digit rates for the quarter. The Casa Herradura portfolio’s net sales grew by double digits on a reported basis and in the mid-single digits on a constant currency basis.
Commenting on the quarter, Paul Varga, ceo said: “The loss of agave plants has reduced our inventory, but we do not believe this will constrain our ability to build our tequila brands to their full potential. While these are certainly challenging economic times, we remain confident about the long-term growth opportunity for our excellent portfolio of premium and super-premium brands.”
More on Brown-Forman’s first quarter tomorrow...
MID-RANGE FRENCH WINES TAKE A HIT
Expensive and well known French wine exports continue to do well, but lower-quality wines are suffering at the hands of New World producers such as Australia, Chile and the U.S.
Volume growth was down in the first half but French producers made more money overall as consumers overseas continue to trade up. Ubifrance, the French export development agency, said in a report released this week that export volumes fell -8.7% in the six months through June. However, the value of French exports increased by 8.2% to $4.7 billion.
While expensive Bordeaux and Burgundy wines bring high returns, less expensive wines from lesser-known regions in France struggle.
Exports of mid-range regional and table wines fell dramatically in the first half, with the number of bottles down by -15.5% on the same period in 2007. As a sector, regional wine export sales fell this year by 3.5% to €488m (£392m).
The strong euro is also making French wines more expensive for American consumers, which takes a negative toll on the lower end of the market.
"The biggest difficulties were encountered in the Anglo-Saxon markets, which tend to like [regional wines]," the report said. "The current problems with the exchange rate have affected these markets in particular and with them these wines from an extremely competitive niche."
The champagne industry has also shown the first signs of suffering from the economic downturn, with both volume and value down by -4.2%and -1.3% respectively.
Until tomorrow, Megan
“There are some things you learn best in calm, and some in storm.”
Willa Cather
--------- Sell Day Calendar ----------
Today’s Sell Day: 20
Sell days this month: 21
Sell days this month last year: 23
This month ends on a: Fri
This month last year ended on a: Fri.
YTD sell days Over/Under: +1
WINE & SPIRITS DAILY
Subscribe or check back issues at: www.winespiritsdaily.com
Send news and comments in confidence to: megan@winespiritsdaily.com
© 2008 Wine & Spirits Daily, all rights reserved. May quote with attribution.
Improving price/mix continues to be the company’s main focus by stressing value over volume. Diageo continued its strategy of focusing on the premium and super-premium brands in North America. As a result, the company saw strong performance in those brands which continued to drive growth in fiscal 2008, while value brands such as Gordon’s experienced weakness. The majority of the priority spirits, wine and beer brands gained share.
Price increases on 40% of spirits volume in the US drove net sales growth despite negative mix within the global priority brands due to the strong growth of Smirnoff and Captain Morgan.
Loss of share in the value brands resulted in overall share of US spirits being broadly maintained during the year at 28.3 percentage points, with share of priority spirits brands up 0.3 percentage points.
Volume was up 2% and net sales grew 5%. Net sales of spirits grew 7%, beer increased 6% and wine was up 12%, which was partially offset by a -10% decrease in net sales of ready to drink.
ECONOMIC AND COST PRESSURES. Price increases and premiumizing brands through marketing helped battle tougher cost pressures from energy, packaging and barley. With that said, Diageo tweaked guidance from 9% to between 7 and 9% for organic operating profit growth for fiscal 2009. The reduction was put in place because of rising input costs and broader economic conditions.
“We’ve seen a 3% increase in costs this year...forecasting expects costs to increase next year across the items we are reliant on, such as grain and packaging,” said Diageo ceo Paul Walsh.
"[The rise in costs] could be even worse. There is no sign of these cost pressures abating," said cfo Nick Rose.
For the first time in a few years, however, Diageo is expecting a positive impact from the exchange rate in fiscal 2009 at about 60 million pounds.
The biggest challenge right now, said Walsh, is the current global economic environment.
Nonetheless, he said Diageo has entered the new fiscal year even stronger, driven by global diversity, strong brands across category, good routes to market, excellent marketing and deep consumer understanding. He said the company is also building strong relationships with customers.
On of the biggest economic effects in the U.S. is the consumer shift from the on-premise to the off-premise. As a result, Diageo is “helping consumers build their confidence to make the perfect cocktail at home that they drink at the bar.” The company said “successful” off-premise campaigns have helped increase off-premise sales in Smirnoff and Captain Morgan.
Common sense would suggest that the value category would actually perform better during slow economic times. However, Walsh said there is always a group of consumers that want to drink expensive alcoholic beverages despite economic pressure.
“Whether you agree with the social justice of this or not, there is still a nucleus of consumers around the world...that have the means and desire to consume the best. That isn’t going to change. The current economic situation will not impact that...they’ve got the money and they want the best.”
He also said people are not drinking more but they’re drinking better.
He called premium and super-premium brands an “affordable indulgence” that gives consumers “status at a very affordable price.”
ACQUISITIONS AND DIVESTMENTS. When asked if Diageo would consider selling some of its value brands, the president of Diageo North America, Ivan Menezes, said the company is happy with its current portfolio and there are no divestment plans.
He pointed out that the value brands are a very small proportion of Diageo’s profitability, and that at the moment “we have a good position across price points. We feel very comfortable that the center of gravity is at premium and premium plus categories.”
Value brands allows Diageo to “maximize value and gives us the position we want with distributors and retailers to grow our categories and continued premiumization trends in U.S.”
During the year Diageo added Ketel One, Zacapa rum and Rosenblum Cellars, which were “already successful brands and we intend to build on that success,” said Walsh.
Also, the company “continues to look at innovative ways to bring new brands to Diageo,” whether it be partnerships or acquisitions.
A CLOSER LOOK AT BRANDS. Smirnoff, Johnnie Walker, Captain Morgan, Crown Royal, Guinness, Sterling Vineyards and Chalone wines were again the performance leaders in North America. Price increases and strong growth of the reserve brands Cîroc, Don Julio and Johnnie Walker Blue Label drove net sales growth. Marketing excluding ready to drink was up 5% with strong investment behind the reserve brands.
The key driver of growth for Captain Morgan was its performance in North America. The brand grew 7% in volume and net sales were up 12% driven by Captain Morgan Original Spiced rum, which gained a further 0.6 percentage points of share despite the launch of two competitor brands in the rum category.
Meanwhile, Jose Cuervo’s performance continued to be affected by the growth of the ultra premium tequila segment in North America. Volumes of Cuervo were down -5% and net sales dropped -4% in the fiscal year. To help reposition the brand in an increasingly premiumized category, Diageo released Jose Cuervo Platino in the first half of 2008 to good consumer response, said the company.
Tanqueray outperformed the declining gin category in North America, gaining 1.6 percentage points of share driven by the continued growth of Tanqueray Rangpur. A price increase on the core brand drove price/mix improvement.
Crown Royal took share in North America and net sales grew benefiting from price increases and successful innovations. Volumes were up 5% and price increases drove net sales up 9%. Crown Royal continued to take share in the North American whiskey category, up 0.4 percentage points.
Smirnoff continued its strong performance from the first half and grew volume 8%. Price increases were taken in key markets, driving net sales growth of 12% and share up 0.2 percentage points.
Johnnie Walker also grew ahead of the category with volume up 5% and net sales up 10% driven by Johnnie Walker Black Label and the super deluxe labels, leading to share growth of 1.2 percentage points. Price increases were taken across the Johnnie Walker range.
The Baileys results were constrained by lower volume in Baileys flavors, which lapped the launch in fiscal 2007. Overall, volumes of Baileys were down -6% and net sales fell -3%. Baileys Original Irish Cream outperformed the category with volume up 3% and net sales up 7% as price increases were taken across most of its markets.
Local priority wines grew volume 6% and net sales were up 8% driven by strong performance of Sterling Vineyards and Chalone and price/mix improvement in Beaulieu Vineyards.
ANHEUSER-BUSCH INBEV. Walsh said he’s not “overly concerned” about Anheuser-Busch InBev.
“We’ll have to sit and wait...I’m not unduly worried about any attack on the spirits category. That said, we respect all our competitors and we will have people as we speak to propel further the market share gains in the US and accelerate spirits category growth. I don’t take anything for granted but I’m not overly concerned.”
JACK DANIEL’S FLAT IN Q1
Volumes of Jack Daniel’s were flat in the U.S. during the first quarter, where global depletions declined -1%. Net sales increased in the low single digits on a constant currency basis.
“Jack Daniel’s US volume trends weakened in 1Q, as depletions were flat following a low single digit increase during 4Q,” said UBS analyst Kaumil Gajrawala. “That said, BFB mentioned volume trends improved in July, driven by increases in promotional activity.”
Gentleman Jack net sales increased by double digits on both a reported and a constant currency basis for the period. Jack Daniel’s Single Barrel delivered solid net sales growth, said the company.
Finlandia net sales also increased by double digits, which reflects higher volumes and pricing gains. Global depletions grew in the high single digits.
Southern Comfort net sales declined in the mid-single digits during the quarter. Volume declines, due in part to softness of the on-premise channel in the brand’s major markets, were offset partially by price increases.
“It is unlikely that SoCo trends improve near-term as we expect on-premise to remain weak,” said Kaumil.
Net sales for Sonoma-Cutrer, Bonterra, Chambord, Tuaca, and Woodford Reserve grew at double-digit rates for the quarter. The Casa Herradura portfolio’s net sales grew by double digits on a reported basis and in the mid-single digits on a constant currency basis.
Commenting on the quarter, Paul Varga, ceo said: “The loss of agave plants has reduced our inventory, but we do not believe this will constrain our ability to build our tequila brands to their full potential. While these are certainly challenging economic times, we remain confident about the long-term growth opportunity for our excellent portfolio of premium and super-premium brands.”
More on Brown-Forman’s first quarter tomorrow...
MID-RANGE FRENCH WINES TAKE A HIT
Expensive and well known French wine exports continue to do well, but lower-quality wines are suffering at the hands of New World producers such as Australia, Chile and the U.S.
Volume growth was down in the first half but French producers made more money overall as consumers overseas continue to trade up. Ubifrance, the French export development agency, said in a report released this week that export volumes fell -8.7% in the six months through June. However, the value of French exports increased by 8.2% to $4.7 billion.
While expensive Bordeaux and Burgundy wines bring high returns, less expensive wines from lesser-known regions in France struggle.
Exports of mid-range regional and table wines fell dramatically in the first half, with the number of bottles down by -15.5% on the same period in 2007. As a sector, regional wine export sales fell this year by 3.5% to €488m (£392m).
The strong euro is also making French wines more expensive for American consumers, which takes a negative toll on the lower end of the market.
"The biggest difficulties were encountered in the Anglo-Saxon markets, which tend to like [regional wines]," the report said. "The current problems with the exchange rate have affected these markets in particular and with them these wines from an extremely competitive niche."
The champagne industry has also shown the first signs of suffering from the economic downturn, with both volume and value down by -4.2%and -1.3% respectively.
Until tomorrow, Megan
“There are some things you learn best in calm, and some in storm.”
Willa Cather
--------- Sell Day Calendar ----------
Today’s Sell Day: 20
Sell days this month: 21
Sell days this month last year: 23
This month ends on a: Fri
This month last year ended on a: Fri.
YTD sell days Over/Under: +1
WINE & SPIRITS DAILY
Subscribe or check back issues at: www.winespiritsdaily.com
Send news and comments in confidence to: megan@winespiritsdaily.com
© 2008 Wine & Spirits Daily, all rights reserved. May quote with attribution.
posted at 1:03 PM
<< Home