Company Trend Analysis - Diageo Eyeing Irish Whiskey Push In US - OCT 2017

BMI View: Diageo ' s US o perations have struggled over recent years due to the company's heavy exposure to vodka and scotch where demand is slowing amid changing consumer preferences. We believe t he company ' s i nvestment in Irish whisk e y offers an option to offset the stagnation in other mainstream spirits categories .

North America is Diageo's most important region from both a sales and margins perspective. North America accounts for over a third of the company's revenue, while operating margins for the region came in at 45.6% in FY17 (compared to 30.2% for the group as a whole). This is driven by the US market, the largest market for premium spirits globally, in which Diageo is the industry-leader with an estimated 22% market share. By comparison, its closest challenger Brown Forman holds around 10%.

We previously highlighted that Diageo was not well-positioned to achieve strong growth in the US spirits market amid shifting consumer preferences ( see 'Pernod & Diageo Not Well Positioned Amid US Spirits Momentum' , September 1 2015). The US spirits sector has gained momentum since 2015, fuelled by a thriving millennial cocktail culture, as consumer confidence has recovered to the levels seen prior to the global economic crisis. However, not all spirits categories are benefiting equally from this industry growth. Demand for Bourbon (American whisky) and tequila is rising strongly on the back of product innovation, effective marketing campaigns and, in the case of the latter, growing Hispanic influences. In contrast, vodka and Scotch whisky - Diageo's two largest product categories - are underperforming as they no longer hold the same appeal among consumers. This has created a challenging environment for Diageo over recent years, with organic growth in the US continuing to lag behind rivals Brown Forman and Beam Suntory, which are more exposed to faster-growing categories such as bourbon.

Craft Trend And Cocktail-Culture Driving Spirits Sales
US - Selected Alcoholic Drinks, Litres mn, % y-o-y
e/f = BMI estimate/forecast. Source: BMI, WHO

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