What Are Diageo’s Key Sources Of Revenue?

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North America, Europe, and the Asia Pacific can be considered the key sources of revenue for Diageo (NYSE:DEO).  Together their contribution to the company’s revenue has increased from 77.4% to 78.4% from FY 2015 to FY 2017.

We have a price estimate of $159 for Diageo, which is higher than the current market price. The charts below have been made using our new, interactive platform. Our interactive model charts out Diageo’s key sources of revenues and you can modify the blue dots in this model to analyze the impact of a change in segment revenues on DEO’s total sales.

North America is the largest premium drinks market in the world, and accounts for about one-third of Diageo’s net sales and half of its operating profits. It is comprised of US Spirits, Diageo Guinness USA (DGUSA), and Diageo Canada. A slowdown in the region had been dragging the otherwise upbeat earnings of the company in the past. Hence, it had become imperative for the company to reverse its sales decline in the region. The company has been able to accomplish this, spurred on by higher sales of North American whiskey, scotch, and tequila brands.

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European revenues have been dampened by negative foreign currency translations in recent years. In FY 2017, while the European volumes increased by just 1%, the revenue was up by 11% in pounds, implying a significant hike in the RPU. However, once the figures are converted into dollars, the metric actually shows a decline. The region currently accounts for almost a quarter of the company’s sales.

Diageo’s acquisition of United Spirits, India’s leading alcoholic beverage company, which gave it a 54.78% stake in the company, bestowed it a foothold in the country, and provided it the footprint to compete and win in India. The region, Diageo’s second biggest market in terms of revenue, is considered to be a key growth market for the company, given the increasing disposable income, as well as the addition of LPA (legal purchase age) consumers. However, certain factors, such as demonetization, the implementation of the Goods and Services Tax (GST), and a Supreme Court ruling prohibiting the sale of alcohol in certain outlets near highways, have resulted in a decline in volumes in India.  China, on the other hand, has been witnessing increased volumes and revenues, which together with higher sales of premium brands in India resulted in a revenue increase in FY 2017.

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