Diageo's Growth Cocktail Is Weak Outside the U.S. -- Heard on the Street
04 August 2020 - 3:33PM
Dow Jones News
By Carol Ryan
It is a pity for Diageo that America's exceptional drinking
habits can't be exported. Returning to growth in other parts of the
world will be a fraught process.
The London-based maker of Johnnie Walker scotch and Guinness
stout said Tuesday that sales in North America fell just 1% over
the six months through June compared with the same period of 2019.
Far tougher conditions everywhere else dragged group sales down 23%
overall. Management sounded cautious about how quickly demand will
recover -- one reason the company's shares fell 6% in early
European trading.
North America, which accounts for 39% of Diageo's revenue, has
been one of the most resilient liquor markets in the world since
the Covid-19 pandemic began. Americans like to drink at home
anyway: Even in normal times, only a fifth of all the liquor
consumed in the U.S. happens in bars or restaurants, brokerage
Bernstein estimates. And the bulk of sales lost in these venues
during lockdowns shifted to supermarkets. Consumers spent 38% more
on spirits to drink in their homes in the 17 weeks to mid-July than
a year ago, according to Nielsen.
Other important markets are structured differently, so will take
longer to return to health. Diageo's sales in Europe and Turkey --
the company's second-most important region by revenue -- fell
almost one-third in the six months through June. Europe's alcohol
market is split fifty-fifty between what is consumed inside and
outside the home. So long as consumers are wary of crowded spaces,
bars and restaurants will be ordering less beer and liquor from
Diageo. The company has already taken back half a million kegs of
unsold Guinness from pubs, mainly in Europe and Africa.
The company took a GBP1.3 billion ($1.7 billion) write-down on
the value of its businesses in India, Nigeria and Ethiopia. Around
60% of Diageo's sales in Africa are beer, which is mainly sold in
bars. Last week, the world's biggest brewer AB InBev also booked a
big impairment charge against its African beer business.
Diageo's Asia division may bounce back first. India is an
important market for scotch, and consumers there are big home
drinkers, like in the U.S. A six-week ban on alcohol sales imposed
by the Indian government, which ended in May, should only be a
temporary shock to demand.
Diageo's share price is 17% off its January high, but that seems
a sensible discount for today's uncertainties. A multiple of 23
times projected earnings is still well above its 10-year average of
19 times. Making a big chunk of sales in the U.S. is a bonus, but
viewed from other corners of the world, the business looks much
less defensive.
Write to Carol Ryan at carol.ryan@wsj.com
(END) Dow Jones Newswires
August 04, 2020 09:18 ET (13:18 GMT)
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