Diageo in strategy ‘shift’ to ‘mainstream’ brands

In light of ongoing economic volatility in the emerging markets, Diageo is implementing a “new shift” away from premium spirits to more “mainstream” brands.

Diageo is focusing on mainstream brands in the emerging markets

Yesterday Diageo reported low single-digit organic sales and volume growth in the first six months of its financial year, which the group said was “in line with expectations”.

However, the Johnnie Walker Scotch and Smirnoff vodka maker saw reported net sales drop £400m (5%) to £5.6bn and operating profits fall £156m (3%) to £1.7bn due to adverse exchange rates against the sterling, principally with regards to the euro, Venezuelan bolivar and the Brazilian real.

H1 sales were also impacted by the sale of “non-core assets”, such as Bushmills Irish whiskey and a large portion of its global wine portfolio.

Due to currency and economic headwinds in the emerging markets, including Latin America, Africa and Asia, Diageo’s new chief financial officer Kathryn Mikells said the group is now starting to focus on pushing its cheaper “mainstream brands” in these regions.

Speaking at a press conference yesterday, she said: “We are continuing to expand mainstream spirits, because as these (emerging) markets come under more pressure, people are looking to move into more value spirits.

“A great example of this will be Black & White in Latin America. We are going to be doing this more in the emerging markets, and this is a space we are going to be much more prevalent in.”

Diageo CEO Ivan Menezes said this strategy marks a “new shift” for the group, which has long focused on premiumisation in the emerging markets.

Overall, Diageo’s organic sales grew 4.5% in the emerging markets “despite market volatility”. The majority of regions grew sales on an organic basis, but in reported terms many declined.

“There’s volatility in the emerging markets, but to talk about them as a single entity doesn’t work. Most of Africa is doing very well,” said Menezes.

“In Mexico, we are taking Black & White Scotch, which is a much more accessible price point. We want to get more people into Scotch, so we have taken the price point lower. In Nigeria, where we have Johnnie Walker Red and Smirnoff, we are now building a very substantial mainstream spirits business which will include USL brands.

“What we have done with Orijin is a great example of this. It brings middle class consumers into the category more than Johnnie Walker Red. We are taking more mainstream brands into Latin America and Asia as well.”

Due to the “challenging economic environment” and “significant adverse change in local tax regulation” in Brazil, Diageo decided to write down the value of its Yipioca cachaça brand by £104m.