Announcing its results for the half year ending June 30 2012, Diageo reported net sales up 8% to ₤10.762bn ($17.08bn) and net profit up 2% to ₤1.942bn; emerging markets supplied 75% of sales growth.
Reflecting on the numbers, Shore Capital analyst Phil Carroll reiterated a 'buy' recommendation on Diageo's stock: "Overall, an excellent set of results from Diageo, in our opinion, albeit largely anticipated by the market.
"We are not expecting upgrades following the numbers today from a top line perspective but the profit performance might see a small increase in expectations going forward," Carroll added.
London-headquartered Diageo said that acquisitions in faster-growing markets, primarily Mey İçki in Turkey, contributed ₤320m in net sales and ₤82m in operating profit after transaction and integration costs.
Discussing Diageo’s results, Walsh said: “We have increased our presence in the faster-growing markets of the world, through both acquisitions and through strong organic growth.”
Specifically on Turkey, he added: “Mey İçki gave us not only Yeni Raki, the clear category leader in the largest spirits category in Turkey, but we also get a distribution system that covers more than 80% of all outlets there. This will significantly improve access for our international brands over the next few years.”
Resurrecting Captain Morgan
Turning to more difficult developed markets, Walsh said that product innovation was central to the firm’s success, as it took brands upmarket and engaged with female consumers.
Walsh gave the example of Captain Morgan Black Spiced, a darker Captain Morgan rum made with molasses and spices, which had breathed life into the wider brand.
Launched in the States at a 35% price premium to the standard product, Walsh said that extension was now sought out by drinkers looking for a more ‘masculine’ whisky drinking occasion.
Walsh was keen to stress Diageo’s strength in depth across a number of price points in different categories, and he said that Guinness Black Lager had greatly improved its beer performance in the US.
Elsewhere, Parrot Bay and Smirnoff frozen pouches also marked successful first steps towards creating a substantial new frozen beverage category, Walsh claimed.
Time to engage the ladies…
Diageo also needed to offer more choices to female consumers, Walsh said the firm had seen great success in North America with recent launches of Cuervo Light Margaritas and Zero Calorie Margarita Mix.
“These same growth drivers apply equally well in the world’s faster growing markets with emerging middle-class consumers,” Walsh said.
He gave the example of Kenya, where Diageo’s market research showed that women didn’t like drinking beer in the on trade, since packaging and liquid were seen as too masculine.
As a result, Walsh said the firm had launched apple-based alcoholic drink Snapp as a “more stylish and sophisticated alternative to beer”.
With a nod towards spirits in emerging markets, Walsh said: “The newly middle-class consumer aspires to brands but may not yet have the income to afford them.
“Innovation which provides premium products at affordable prices is therefore a key growth driver.”
Examples of such products included Rowsons Reserve (Diageo’s latest release in prestige Indian-made foreign liquor), and in Latin America Haig Supreme, an affordable scotch “but with all the premium cues of an international brand”.