Today I am outlining why Diageo (LSE: DGE) (NYSE: DEO.US) could be considered an attractive addition to any stocks portfolio.
Premium drive powers revenues prospects
Diageo has ploughed vast sums into developing its range of premium brands in recent times, a programme that helped deliver a 14% rise across this product range during the 12 months ending June 2014.
And latest research suggests that the drinks leviathan has backed the right horse due to a seismic shift in consumer demographics, and more specifically as rising wealth in developing regions heads through the roof.
Indeed, research house TechNavio reported this month that sales of alcoholic drinks across the globe are set to rise at a compound annual growth rate of 1.49% in volume terms through to 2018, and by 3.16% when it comes to revenues. Crucially the body expects an explosion in higher-priced products to drive this growth, explaining that: “premium brands are currently at a high demand when compared to economically priced products because of the increase in disposable income of consumers, the use of alcohol as a status-symbol, the need for luxury, and the association of the ‘premium’ label with beverage quality and taste.”
Following the instalment of chief executive Ivan Menezes last year, Diageo has accelerated the roll-out of such higher-priced products in a bid to mitigate the impact of sales weakness in other areas and improve margins.
And the drinks leviathan is taking full advantage of its burgeoning portfolio of market-leading labels to maximise the effectiveness of the drive, and the introduction of its Johnnie Walker Gold and Platinum varieties in the US last year, for example, helped to push sales of its premium products across this particular brand 50% higher.
Diageo is also honing in on fresh new geographies to boost sales of its higher-margin products. Indeed, head of the firm’s Africa Regional Markets division, Ekwunife Okoli, informed Bloomberg this week of the firm’s intention to establish a distribution company in Angola in order to latch onto galloping spirits demand on the continent. The business already operates a Gilbey’s gin factory in Mozambique and is looking to begin bottling Smirnoff Ice there.
Undoubtedly, the impact of macroeconomic cooling in Asia has taken the shine off Diageo’s growth outlook in recent times, particularly on the back of crippling anti-extravagance measures in China. Still, I believe that rising affluence levels in these critical regions, not to mention in its core markets in North America, should drive premium sales — and with it revenues expansion — sky high in coming years.
