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Diageo was formed in December 1997 through the merger of Guiness and Grand Metropolitan, and the group is divided into four distinct business segments.
This is how each segment contributes to the group as a whole, in the twelve months to 30th June 1999.
Hmmm...
In terms of sales growth, and particularly volume growth, the 1999 review of the Spirits and Wine operation is disheartening. Overall, divisional sales for the period were down 1% on a like-for-like basis.
My anxiety is furthered by the fact that the total volume of the above nine brands was down 2% in the year. In the Far East, volumes of some brands declined up to 40%. With overall Spirits growth non-existent, and the division supplying 40% of Diageo's group sales and 50% of group profits, my first impressions are not encouraging.
Similarly to the Spirits division, I've not been overwhelmed by eye-opening sales and volume growth rates from this Packaged Foods division.
On to Beer. Sales rose 4% in 1999, with total volume increasing 3%. Guinness volumes were 6% higher, although the other beer brands generated no overall additional growth.
Overall, I feel I should go no further. Although I've only taken into account the figures from 1999, there does appear to be miniscule revenue growth within the two significant Spirits and Food divisions. Not only minimal growth, but frighteningly, volumes in more established markets are flat or declining.
Subsequent to Larry's post on the Qualiport message board, there were messages describing the ever-increasing number of Irish theme pubs, all of which ought to use Guinness. Coupled with my own observation of the greater number of fast food outlets springing up around the country, it led me to ask: is there true sales growth potential at Diageo?
Could Diageo be a possible replacement for Unilever (LSE: ULVR), perhaps, as the Qualiport's consumer goods company? Although Bruce considered Diageo back in March last year, I've had a quick look through the latest Diageo annual report. Has anything changed in the last year?
Business Divisions
Turnover Operating Profit
(£m) (%) (£m) (%)
Spirits and Wine 4,929 41.8 967 50.8
Packaged Food 3,757 31.9 478 25.2
Beer 2,234 18.9 273 14.3
Quick service 875 7.4 185 9.7
restaurants
Total 11,795 1,903
Having looked at the divisional breakdown, I'm very disappointed. The enticing Guinness and Burger King brands are dwarfed by both the Spirits and Packaged Foods divisions. For substantial Diageo revenue growth, significant responsibility rests upon the likes of Johnnie Walker, Smirnoff and the Pillsbury Dough Boy. At this point, it is worth remembering that material avenues for sales growth are key for any potential Qualiport company.
Spirits and Dough
A quick review of the latest figures for Diageo's nine "global priority brands", in order of their revenue significance, does give a rather mixed performance.
Brand Volume
Change
Johnnie Walker Black -4%
Johnnie Walker Red -12%
Smirnoff +2%
J&B volumes -4%
Baileys +2%
Gordon's -8%
Cuervo +9%
Tanqueray +6%
Malibu +5%
Packaged Foods fares little better. Sales in this division were up 2% in the last financial year, with volumes up just 1%. Volume throughout the year in the major North American market was flat. The declines in the core Pillsbury "Desserts and Baking Mixes" operation appear to have offset a few creditable accomplishments elsewhere.
The performances from a selection of notable contributors within this division:
Brand Sales
Growth
Desserts and Baking Mixes -6%
Refrigerated Baked Goods -4%
Green Giant +4%
Progresso Soup +11%
Old El Paso (US) -6%
Old El Paso (Europe) +35%
Haagen-Dazs -3%
Beer and Burgers
The sales increase of Guinness does vary widely around the globe. The UK witnessed 5% growth, the US generated 16% growth and Nigeria produced a stunning 40% growth in revenue. On the other hand, Malaysia and Indonesia suffered 8% and 6% sales declines respectively.
It's a tale of two halves at Burger King. In the saturated US market, sales rose in line with an additional 3% increase of new restaurants. Outside the US, a 20% increase in the number of European restaurants has helped like-for-like sales improve 10% over the last two years. A 14% increase of restaurants in Latin America has contributed towards like-for-like sales growth of 7%. Non-US restaurants now account for 12% of total operating profits for the division and profits have doubled over the last year.
In Summary
I can understand that economic weakness caused a deterioration in the Far Eastern premium drinks market, but for Diageo to suffer a 3% volume decline in the equivalent North American market is far too much for me. Alongside a 12% decline in wine volumes, it's all very scary.
There are one or two worrying comments in the Annual Report on this subject. The remark "sixteen years of decline in consumption have meant that spirits have consistently lost market share of the total US beverage market" gives me the shivers when considering Diageo's heavy reliance on this particular area.
After reading the Diageo annual report, it just doesn't appear the group as a whole is generating sufficient rates of revenue growth for Qualiport inclusion. Improvements in overseas revenues from Guinness and Burger King are clouded by dismal performances by the larger divisions. I could be interested in the two better operations should Diageo ever decide to spin them off.
Since the formation of Diageo, group sales have actually fallen from £13.0b to £11.8b, as the company embarked on the disposal of non-core brands. Profits have largely risen on the back of synergies and cost-cutting from the merger. But disposals and margin improvements can only go so far. For a long term buy and hold, investors need proof of sales potential.
In terms of these global consumer goods companies, I always contemplate Buffett's purchase of Coca-Cola (NYSE: KO.) back in the late 1980s. There were two attractions to Coke. Firstly, there was proven non-US sales growth. Coke revenues were rising substantially in Europe and the Far East. Secondly, and just as important, it was largely focused on one universal and affordable product.
On both of these two points, Diageo fails. From reading the figures, I just can't get excited about Diageo's global volume growth. And on the second "universal appeal" point, I can do no better than repeat what Bruce wrote last year when comparing Diageo to Unilever:
"I'd say that Unilever has a distinct edge in the global expansion stakes. It sells cheaper branded consumable goods such as washing powder and hair care products. These are classic repeat purchase goods. On the other hand, many of Diageo's brands, such as spirits, are hardly the sort of things you can gulp down in double quick time. The majority of spirit drinkers will keep a bottle at home for many weeks, if not months or years. In all that time, they won't be going out to buy another bottle. Washing machine powder just doesn't work like that! Diageo also sells much higher-priced products, and some countries don't allow alcohol to be consumed. In all, it looks like Diageo may struggle to roll out premium brands to all corners of the globe."
I feel buying Diageo would be akin to buying a second-class Unilever -- in essence a similarly large and pedestrian company, but having far more exposure to economically-sensitive products with limited appeal.
The presence of Unilever in the Qualiport has already been openly questioned. If the Qualiport buys shares in Diageo, it'll be jumping out of the frying pan and into the fire.
So, is Diageo a second-class Unilever? Does it lack material sales growth potential? Or have I paid too much attention to one set of figures? All feedback is welcome and can be directed to the Qualiport message board.
Related Links
• Bruce Jackson looks at Diageo for the Qualiport, 17/3/99