Diageo profits leap +32% to £3.1bn

By Doug Newhouse |


Star growth markets for the Diageo drinks giant over the last year included Asia, Africa, Latin America and duty free as total sales rose +10% to £14.6bn.

Within its vast business, Diageo added that its Global Travel Asia and Middle East region in particular remained strong, In Global Travel Asia, reserve brands net sales increased 37% supported by the successful launch of Johnnie Walker Platinum, Gold Label Reserve, XR21 and the Blue Label Casks Edition.

 

[Left: Company CEO Paul Walsh]

 

The increased focus on reserve brands together with price increases and product differentiation strategy for duty free consumers resulted in 31% net sales growth for Global Travel Asia. Meanwhile, the Middle East region was impacted by price increases and despite a 9% positive price/mix, net sales still declined 2% as a result.

 

Interestingly, the company added that its Chinese white spirits delivered 36% net sales growth outside of China, driven by price increases and their expanded distribution footprint with Shui Jing Fang now available in the duty free channel at forty airports and on two airlines worldwide and also in seven domestic markets.

 

Turning back to the global picture, Company CEO Paul Walsh pointed to strong overall profits growth with net sales in emerging markets up by around 15% for the full year to the end of June. Emerging markets currently account for around 40% of all Diageo’s business.

 

In total, pre-tax profits for the year came in at £3.1bn, up +32% on last year’s £2.4bn. Acquisitions in faster growing markets, primarily Mey İçki in Turkey, added £320m of net sales and £82m of operating profit after transaction and integration costs. During the year Diageo also increased its ownership stake in Shuijingfang and Halico and announced an agreement to acquire the Ypióca brand in Brazil and the intention to invest a further £1bn in Scotch capacity.

 

LEADING BRANDS’ CONSOLIDATION

Commenting on the results, Walsh said: “Diageo is a strong business, getting stronger and the results we released this morning show that very clearly. We have increased our presence in the faster growing markets of the world, through both acquisitions and strong organic growth. We have enhanced our leading brand positions globally, through effective marketing and industry leading innovation and we have strengthened our routes to market.

 

“Six per cent organic top line growth, 9% operating profit growth and 60 basis points of margin expansion is a strong performance and demonstrates our commitment to delivering efficient growth. A year ago I set out our expectations for the medium term and these results put us firmly on track to meet those goals. In F12, we have continued to invest to ensure this business is well positioned for the future. Our confidence in the achievement of our medium-term guidance is underscored by the 8% recommended increase in our final dividend.”

 

Looking within the company’s business review, Larry Schwartz, President, Diageo North America said: “The North American business has delivered another strong set of results. We have continued to drive price/mix by staying focused on: disciplined promotional spend, growth of our strategic brands and the continued growth of our premium and super premium brands, most notably Johnnie Walker and Cîroc.

 

“We’ve achieved this through consistent investment in targeted campaigns that have improved brand equities. Innovation continues to be a competitive strength and we have both sustained past launches and delivered exciting new products. Previously identified enhancements to our distribution system were implemented in the year and will benefit our future growth. Strong pricing and mix shift to premium products, coupled with our continued focus on cost, drove margin improvement, however this was offset by higher marketing. These measures, taken together, have delivered efficient growth and strengthened our business.”

 

The company reported a strong delivery from its strategic brands in the United States, resulting in spirits net sales growth of 7% and good performance in North America. Incremental net sales were driven by Cîroc, up 61%, as the strong performance of existing variants was amplified by the launch of Cîroc Peach, Diageo’s most successful North American product launch to date.

 

The performance of beer improved overall as Guinness more than offset softness in other beer brands, while ready to drink net sales returned to growth, with strong performance launches such as Parrot Bay and Smirnoff pouches. At the same time, cocktails, including Jose Cuervo Light Margarita, Zero Calorie Margarita Mix and Light Margarita Flavours offset declines on Smirnoff ready to drink.

 

UNEVEN EUROPEAN ECONOMY

Turning to Europe, Andrew Morgan, President, Diageo Europe said: “The economy remains very uneven in Europe. We continue to deliver substantial sales and profit growth in Europe’s emerging countries of Russia, Eastern Europe and Turkey, as well as a good performance across Northern Europe. Clearly though, Southern Europe remains challenging.

 

“From a category point of view, Scotch remained very strong in the emerging markets offsetting decline in Southern Europe. Smirnoff continued to grow in Great Britain and Captain Morgan continued to perform strongly with 18% net sales growth. Weaker Baileys performance was driven by the change in promotional strategy in Great Britain and the challenges in Southern Europe.

 

“Overall marketing campaign activity has been maintained and the reinvestment rate increased as we spent more behind Scotch and emerging markets while improving effectiveness in Western Europe.”

 

Rounding up the performance of his division, Randy Millian, President, Diageo Latin America and Caribbean said: “Our performance in Latin America and Caribbean during the year demonstrated the strength and sustainability of our business. In order to capture the consumer opportunity in the emerging middle class, we increased marketing spend to enhance our brand equities in Scotch, increase the resonance of vodka and support innovation.

 

“We enhanced our routes to market with more dedicated distributors in Brazil, a new distributor agreement in Costa Rica and a new supply distribution centre in Panama. Additionally, we have helped more than 12,000 people acquire vocational skills through our Learning for Life programme. We finished the year with the exciting acquisition of Ypióca, which will dramatically expand our presence in Brazil. This sustained investment is building a strong and successful business.”

 

Another successful year was also reported by the head of the Asia Pacific division who said Diageo had maintained its leadership position in international spirits and gained share in all key markets and categories. Gilbert Ghostine, President, Diageo Asia Pacific said: “The emerging markets of Asia grew double digit with South East Asia up 15%, Greater China 13% and India 24%. Uncertainty around the global economy led to further contraction of the whisky market in Korea and weaker consumer confidence in Australia which led to roughly flat net sales in developed Asia Pacific.

 

“The price increases we implemented in South East Asia, China and Global Travel Asia drove more than half of our incremental top line, and this together with the premiumisation of our portfolio delivered six percentage points of positive price/mix. Scotch remained the growth engine of the region delivering more than 80% of net sales growth and almost half of this growth came from our super deluxe brands.

 

“Other reserve brands also performed well, with very strong net sales growth from Zacapa, Ketel One vodka and Cîroc. I am also proud of the performance of Guinness, delivering 12% net sales growth through share gains and strong pricing. We continued to invest in infrastructure, sales execution, innovation and acquisitions, including our increased stake in Shuijingfang in China and Halico in Vietnam, creating a stronger platform for future growth. Despite these investments and as a result of our successful premiumisation strategy and focus on pricing, operating margin improved in the year.”

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