What Resulted In A Turnaround In Diageo’s North American Business?

In its year ended June 2016 earnings, Diageo (NYSE:DEO) reported organic sales growth of 2.8%, after two years of largely flat growth, heralding a “single mid-digit top line growth” in 2017. This performance was last achieved in 2013, after which the company has had to deal with changing consumer tastes and preferences in North America, the group’s largest market, and a slowdown in emerging markets, which has been the focus of Diageo’s investments. Better than expected turnaround of US Spirits, a recovery in Europe, which accounts for 24% of the company’s operating profit, and 5% growth in India, Diageo’s second biggest single market, helped to spur this growth. Going forward, the company should grow at mid-single digits over the next three years, with a percentage point improvement in operating margins.

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North America is the largest premium drinks market in the world, and accounts for about one-third of Diageo’s net sales and a half of its operating profit. It comprises US Spirits, Diageo Guinness USA (DGUSA), and Diageo Canada. During the first half of its FY 2016 (six months ended December 2015), the company reported a decline in the net sales and volumes for the North American region. This was primarily a result of a fall in US spirits, due to late launches in the half and the implementation of the replenishment model for innovations, which reduced the shipment level, when compared to the first half of FY 2015.

However, recovery was already seen in the second quarter (three months ended December 2015) of the company’s performance in North America, with the quarterly growth rates improving from a negative 10.4% to a positive 4.7%

For the full financial year, North America delivered net sales growth of 3%, after a strong performance of a 10% increase in the second half of the year in US Spirits. This was driven by growth in North American whiskey, scotch, and tequila, which resulted in a positive mix. North American whiskey was the standout performer, accounting for one-half of the overall net sales growth, with net sales up 6%, due to share gains by Crown Royal and Bulleit. The company’s ‘The One Made For A King’ campaign for Crown Royal Deluxe benefited the company, as it focused on the quality and heritage of the brand. In scotch, Johnnie Walker and Buchanan performed well, with a growth in net sales of 7% and 9%, respectively. The former was largely driven by its reserve variants, which were up 23%, while the latter improved as the ‘A lo Grande’ campaign enhanced the brand’s connection with the Hispanic consumers. The company’s tequila brand Don Julio increased its net sales by 34%, making it the fastest growing brand in the portfolio.

Have more questions on Diageo? See the links below:

• How Did Diageo Perform In Its FY 2016 In Terms Of Key Financial Indicators?
• Diageo Returns To Growth, Outlook Looks Bright
• Will US Spirits Volume Growth Boost Diageo’s Year Ended June 2016 Results?
• Why Did Diageo Invest In A Non-Alcoholic Drinks Company?
• Can There Be A Silver Lining For Diageo In The Aftermath Of The Brexit?
• How Will Brexit Impact Diageo?
• What Has Been Driving The U.S. Spirits Market?
• What Is The Share Of Premium Spirits In The U.S.?
• What Is The State Of The U.S. Distilled Spirits Market?
• What Is Diageo’s Position in India’s Alcoholic Beverage Market?
• Why Are We Bullish On Diageo?
• Why Is Diageo Bullish On The African Beer Market?
• Was Don Julio Tequila A Shot Worth Taking For Diageo?
• What Is India’s Share In The Net Sales Of Diageo Before And After The Purchase Of United Spirits Limited?
• Diageo: Year 2015 In Review
• How Will Diageo’s Revenue And EBITDA Composition Change In The Next Three Years?
• Where Will Diageo’s Growth Come From In The Next Three Years?
• What is Diageo’s Fundamental Value Based On Expected 2016 Results?
• What Is The Share Of Global Net Sales For Diageo, By Alcohol Category, And How Has It Changed?
• How Has Diageo’s Revenue And EBITDA Composition Changed In The Last 3 Years?
• How Has Diageo’s Volume Share Of Premium Spirits Changed Over The Years?
• What Are Diageo’s Highest And Lowest Growth Markets?
• By What Percentage Did Diageo’s Revenue & EBITDA Decline In The Last 3 Years?
• What Is Diageo’s Revenue And EBITDA Breakdown?
• How Has Diageo’s Volume Composition Changed In The Last 3 Years?

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