Diageo: premiumisation will survive recession

Ivan Menezes, Diageo CEO, said he has confidence the firm’s growth in the affordable luxury sector will continue through an upcoming recession.

Diageo posted double-digit growth in its 2022 fiscal report, with the Diageo’s premium-plus brands contributing 57% of reported net sales, with an organic net sales growth of 71%.

However, according to data from the Office for National Statistics, 91% of adults in the Great Britain reported an increase in their cost of living between June and July 2022. The annual rate of inflation in June 2022 was the highest it had been since 1982, affecting the affordability of goods and services for households.

Despite this, Menezes doesn’t believe consumer purchasing habits in the premium-plus alcohol sector will change.

“The trend of people drinking better has been in place for a long time,” he said. “It’s not a recent trend, and even when you go back through old economic cycles – the global financial crisis for one – you saw a few quarters where that trend reversed a little bit, but it came roaring back.

“I’d say the trend data is very reassuring because you can look at countries that have gone through shocks and come back from it. Now why is that the case, that is the question. It is because the category we are in is affordable luxury.

“In the US, households that consume spirits, which is only one in two households, spend US$330 a year – a dollar a day on spirits. So if you’re buying three bottles of Ketel One a year, are you going to trade down to three bottles of Smirnoff?

“Now of course some consumers will, but by and large, because the brand is so important in terms of in socialising and in celebration, the affordable luxury nature of the product really helps.”

The Bank of England has said the UK is likely to enter recession in the final quarter of 2022, following last week’s announcement that it would be increasing the UK interest rate to its highest level in 27 years.

However, despite a decrease in consumers’ disposable income, Menezes believes Diageo’s “surgical approach” towards revenue growth and price increases will allow the firm to continue with its positive volume increase.

“We are very focused on recruiting more consumers to buy our brands,” he added. “The brands are strong, we’re keeping our investment in them.

“We only have 4.5% of the market, so there’s a lot where if we do our job right of building our brands, we’ll be more attractive than the alternatives in alcohol – so that gives us good runway.”

Menezes added that the spirits category is currently gaining traction from beer and wine. “Spirits in many markets are actually very good value.

“For example, a Don Julio on the rocks, for equivalent drinks, is the same as drinking a no-name bottle of wine that is US$10 a bottle. So even at these high prices, it is good value versus wine and beer. So all of that says there is good resilience.”

Last week The Scottish Licensed Trade Association (SLTA) warned the interest rate increase could be too much for some smaller businesses to bear.