Diageo Plc’s 2 Greatest Strengths

Two standout factors supporting an investment in Diageo plc (LON:DGE).

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When I think of alcoholic beverage producer Diageo (LSE: DGE) (NYSE: DEO.US), two factors jump out at me as the firm’s greatest strengths and top the list of what makes the company  attractive as an investment proposition.

1) Emerging-market sales

Despite Diageo’s £47,600 million market capitalisation, the firm has great potential to expand further into population-dense areas as their economies emerge and mature. The firm already derives about 42% of its operating profit from Africa, Eastern Europe, Turkey, Latin America, the Caribbean and the Asia Pacific, making such emerging markets important to the company.

The brisk pace of gathering affluence in up-and-coming areas has been driving some perky looking growth numbers. For example, a recent management update reported double-digit sales growth in Latin America and the Caribbean. When we think of raw statistics for population numbers in such areas, it’s easy to imagine the latent growth potential still remaining for Diageo as it distributes its well-known drinks brands. As the firm gains further traction in emerging markets, well-established business in Western Europe and the US becomes less influential on the firm’s overall trading results. With Western Europe recently delivering just 17% of Diageo’s operating profit and North America 41% it doesn’t seem like being long before emerging markets will account for more than half of the firm’s business, making Diageo a cracking emerging market play going forward.

2) Consumable products

There’s nothing better than being big in emerging markets than being big in emerging markets, with consumable brands. Diageo owns some of the world’s best-known brands across the spirits, beers and wines spectrum. However, the firm classifies some of its brands as ‘strategic’ because they are names that it has identified as primary growth drivers across all markets and, as such, they are the main focus for the firm.

The directors reckon these super brands have broad consumer appeal across geographies and are capable of meeting new and emerging consumer trends. Diageo’s strategy is to invest in these super brands on a global basis with consistent marketing from country to country.

Any investment in Diageo is therefore an investment backing the firm’s well-known and often-loved super brands, so I think it’s worth listing them: Johnnie Walker, Crown Royal, J&B, Buchanan’s, Windsor, Bushmills, Smirnoff, Ketel One Vodka, Ciroc, Captain Morgan, Baileys, Tanqueray and Guinness.

I reckon it’s a safe bet that most have heard at least some of these famous names, so now you know what you’re getting into with Diageo. As with all consumable products, people buy them, use them and buy them again. With alcoholic beverages, there’s the added attraction of the products addictive qualities to help bolster the steady cash flow generated from sales.

What now?

Diageo’s emerging-market presence combines with its consumer-product credentials to create an attractive business model.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

> Kevin does not own any Diageo shares.

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