London - Diageo, the world's
largest spirits maker, spotted in 2015 that drinkers in the
emerging middle class in Ghana and Cameroon were keen to show
off their new status by buying their own bottles of Johnnie
Walker rather than shots.
The company increased production of smaller bottles, helping
to lift Johnnie Walker sales 12 percent in Africa in the first
half of its 2017 fiscal year and contributing to Diageo's first
sales growth in Scotch in over three years.
Diageo and spirits peers including Pernod Ricard
and Brown-Forman were hurt by a slowdown starting in
2013 in emerging markets where they had found much of their
growth. The world leader particularly suffered, as its
wholesalers had large stocks to run down.
Chief Executive Ivan Menezes called 2016 a "transition
year" to get back on track following changes to make Diageo more
responsive, including removing management layers and giving more
power to local managers, such as the ones in Africa who noticed
the demand for smaller bottles.
"What's happened is that global and local got a lot
closer," said Stephen White, Diageo's general manager for
African innovation.
"It's definitely sped things up and it's a better set-up
certainly for a market like Africa where you need a more
entrepreneurial space to be able to operate."
Diageo's half-year results in January were the strongest of
Menezes' three-year tenure, and signaled to investors that his
turnaround plan was working.
He has put a much keener focus in the business on Scotch
which is made in Scotland and accounts for more than a quarter
of Diageo's sales, a third of its profits and derives the
majority of its sales in emerging markets.
Aside from expanding the reach and improving the marketing
of premium, global brands like Johnnie Walker, the strategy for
emerging markets includes offering more lower-priced whisky
brands, including VAT 69, White Horse and Black & White.
Black & White recently became the top-selling Scotch in
recession-hit Brazil, Diageo said, following sales growth of 58
percent there in the most recent period.
Weak spots
Still, Liberum analyst Alicia Forry downgraded the shares to
"sell" in January, noting that the improvement was already
priced in. While she acknowledged the better performance,
particularly in Johnnie Walker, she said people "should not get
carried away" since other Diageo brands were struggling.
The vodka brand Smirnoff fell 2 percent, hurt by ongoing
discounting. A spokeswoman for Diageo acknowledged that it was a
tough category and said: "There is more work to do in recruiting
and re-recruiting multi-cultural consumers as well as Gen X and
baby boomers".
Beer, which represents 16 percent of Diageo's sales, was
also lacklustre with flat sales. Guinness, its main beer brand,
has faced increased competition, from craft beers in North
America and Europe, and cheaper brews like Anheuser-Busch
InBev's Hero and its own local brand Satsenbrau, in the
important market of Nigeria.
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Following the 2015 divestiture of Diageo's wine business,
analysts have speculated that Diageo could sell the beer
division to focus exclusively on spirits. Diageo has repeatedly
said beer is key to its strategy in Africa, as it provides a
distribution platform for spirits.
Another weak spot for Diageo, analysts say, is its
relatively small position in bourbon whiskey, a growing market
due to a resurgence of classic cocktails in the United States
where bourbon is made.
Diageo's Bulleit bourbon grew net sales 29 percent in the
first half, but its overall position remains small versus rivals
Beam Suntory and Brown-Forman. However, its Canadian
Crown Royal whiskey brand has gained market share and gives it a
large foothold in the wider category of North American whiskey
which includes bourbon.
Sales change
As part of its efforts to react more quickly to trends,
Diageo said in late 2013 it would change its sales focus, to
monitor not only what it sells to wholesalers, but also what
they sell to retailers. This is seen as a better measure of what
people are drinking and is meant to make sales more consistent.
That change hit Diageo's sales in 2014 and 2015 as wholesale
customers worked through stocks, but Janus Capital analyst Greg
Kuczynski said it should make for a smoother business and a
higher stock price.
"There's a lot of investment shops that probably turned away
from a company like Diageo because they just don't want to have
exposure to the stocking and destocking cycles which can be so
painful," said Kuczynski, whose firm is a top 60 Diageo
shareholder, according to Reuters data.
The measure also gives real-time data that can speed up
forecasting, decision-making and innovation. Johnnie Walker used
such sales data from the September launch of its first
limited-edition experiment, Red Rye Finish, to better allocate
stock for its second one.
It has helped cut the time it takes to get new products to
market down to an average of 34 weeks. Johnnie Walker Green
Label, largely discontinued in 2012, was brought back in 2016 in
only 9 weeks, it said.
Diageo also says the business has benefited from increased
investment made possible by a "zero-based budgeting" system to
help it save 500 million pounds over three years.
The company may also be on the cusp of more changes, given
the arrival in January of a new chairman, Javier Ferran, a
drinks industry and private equity veteran.
"Companies do not change overnight, however we think Diageo
could start to look different," said Jefferies analyst Edward
Mundy. He mentioned more cost cutting and the possible sale of
the beer business if needed to fund a buyout of Moet Hennessy,
of which Diageo owns a stake.