Why Diageo Wants to Dump $1 Billion Worth of Spirits

Global distillery Diageo (NYSE: DEO) isn’t going around with guns a-blazing, but its reason for pursuing the premium and super-premium spirits market is the same as that offered by infamous outlaw Willie Sutton on why he robbed banks: “Because that’s where the money is.”

Diageo was recently reported to be interested in selling off about $1 billion worth of assets, including Canadian whisky Seagrams VO, Myer’s rum, Goldschlager cinnamon schnapps, Popov vodka, and the licorice-flavored Romana Sambuca liqueur. The move would make the distiller even more focused on its high-end drinks business.

Global distiller Diageo has a preference for high-end spirits. Image source: Getty Images.

Top billing

Diageo is one of the world’s largest distillers, and premium and above brands account for roughly two-thirds of total net sales.

It derives a quarter of its $15.9 billion in annual revenue from its Scotch portfolio, namely the Johnnie Walker brand, but Diageo also owns some of the most distinctive names with top-shelf positioning in markets around the globe, such as Buchanan’s, the second most popular scotch in the U.S.; Black & White, Diageo’s top seller in Brazil; and J&B, the No. 1 scotch in Spain.

Diageo has always had a thirst for spirits that were largely a cut above the others, particularly if it was backed by star power.

In 2007, Diageo partnered with rap impresario Sean Combs to build the Ciroc vodka label into a $100 million brand, and it followed that up a few years later by purchasing his super premium tequila brand DeLeon. Last year, it bought actor George Clooney’s super premium tequila Casamigos for $1 billion.

So long as a spirit is top shelf, Diageo is willing to sample it. After it split with Casa Cuervo several years ago, it ended up selling its Bushmills Irish whisky to the tequila maker in exchange for its high-end Don Julio tequila, which has since gone on to become one of Diageo’s bestsellers. And earlier this year, Diego acquired premium apertif Belsazar, the first acquisition made by its venture capital arm Distill Ventures.

Consumers willing to pay up

Diageo has good cause to pursue this niche. According to the Distilled Spirits Council of the U.S. (DISCUS), spirits supplier sales rose $1 billion in 2017 to $26.2 billion, a 4% increase over the prior year and the eighth consecutive year spirits had gained market share in adult beverages. And it was due to the strength of the premium and super-premium categories.

A decade ago, value spirits (defined as $12 a bottle or less) represented 40% of total sales, while high-priced spirits costing $20 or more per bottle accounted for less than 25% of the total. Last year, though, the value category had fallen to 33% of the total, while the more expensive spirits rose to 32%.

Data from the market researchers at Nielsen show high-end spirits now account for 55% of total spirits volume and 62% of dollar sales, with ultra premium spirits growing the fastest.

Profits worth paying for

Diageo’s primary portfolio orbits around six global brands that represent 41% of total net sales; seven “local stars” that are popular in different markets, representing 20% of sales; and a dozen “reserve” brands, which are spirits at above-premium price points, that account for another 16% of sales.

Diageo maintains its real growth opportunity is in the premiumization trend that’s been developing for years, and that as incomes rise globally, premium spirits will become available to more than 730 million new consumers over the next decade.

Through acquisitions, positioning in emerging markets, and a focus on high-margin spirits, Diageo can better build sales and profits. Over the first half of its fiscal year, the distiller reported organic net sales growth of 4.2% and organic volume growth of 1.8%, while organic operating profits grew 6.7%. It continues to expect organic net sales for the full fiscal year to improve in the mid-single-digits, with margins growing 175 basis points over the three-year period ending on June 30.

As the company sheds lower-value offerings, expect Diageo to pick up even more premium and super-premium labels, because that’s where the money is.

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Rich Duprey has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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