How Important Is North America For Diageo’s Growth?
North America (NA) has maintained its position as the largest revenue segment for Diageo (NYSE: DEO) over recent years. Diageo’s Revenues (shows Diageo’s key revenue components) have increased from $15.4 billion in 2016 to $16.6 billion in 2019, adding about $1.2 billion in three years. During the same period, the North American division has added about $0.5 billion in revenue, thus accounting for 45% of the increase, whereas the other four divisions (Europe, Africa, Latin America, and Asia-Pacific) together accounted for the other 55%.
Can North America continue to command the kind of significance it used to? To understand this, please refer to the Trefis interactive dashboard – What Is The Importance Of North America In Diageo’s Business? In addition, here is more Consumer Staples data.
Division Overview
What is on Offer?
- The North America business comprises US Spirits and Wines, Diageo Guinness USA (DGUSA), and Diageo Canada.
- Product categories include: (i) Scotch Whiskey: Johnnie Walker, Crown Royal, J&B; (ii) Vodka: Smirnoff, Ciroc; (iii) Rum: Captain Morgan; (iv) Beer: Guinness; (v) Others: Baileys, Gordon’s Gin, etc.
Who is Paying?
- Diageo offers a wide variety of alcohol products, ranging from value to ultra-premium categories that cater to a large alcohol-drinking customer base.
- On the basis of quality and price, Diageo’s beverage offerings can be differentiated into: (i) Ultra-Premium Brands, (ii) Super Premium Brands, (iii) Premium Brands, (iv) Standard Brands, (v) Value Brands.
- For example, Johnnie Walker Blue Label and Ciroc are ultra-premium brands, whereas Smirnoff and Baileys are standard brands.
Segment Revenue Trend
- North America’s revenues have increased from $5.3 billion in 2016 to $5.8 billion in 2019, adding about $0.5 billion to its revenue base in three years.
- The trend is expected to continue with Trefis estimating segment revenues to grow further to $6 billion in FY2020, driven by an increase in the share of scotch and growth in both Diageo Beer Company USA (DBC USA) and Canada.
To understand how other operating segments of Diageo have performed, please refer to the Trefis analysis – Diageo Revenues: How Does Diageo Make Money?
Volume Share
- North America witnessed pressure in volume sales in 2017 and 2018, however, with increased marketing investment and campaigns, with rising scotch sales, total segment volume saw a turnaround in 2019.
- NA’s volume share has been around 19%-20% over recent years.
- Though it will remain range-bound in 2020, it might see marginal y-o-y decline despite absolute volume sales expected to increase.
- This decrease in share would mainly reflect higher growth in Asia-Pacific volume sales after regulatory clarity for alcohol sale in India, and rising sales in China.
Revenue Share
- Historically, North America has contributed a little over one-third of Diageo’s total revenues, with the segment holding the largest revenue share of 34-35% in the company.
- Though the segment as well as company revenue is expected to increase in 2020, the segment contribution is expected to drop marginally (mainly due to faster growth in Asia-Pacific), though it would still remain range-bound between 34%-35%.
- The division’s largest share is due to higher sale of DEO’s premium brands in the region which drives maximum price realization for North America among all divisions.
Most Profitable Segment
- North America has been the most profitable division of Diageo, with its operating profit margin being about 1.5x of Diageo’s total operating profit margin.
- Though segment margins are on a declining trend due to increased marketing investment and higher commodity and logistics cost, North America is expected to continue to be the primary driver of Diageo’s profitability in the near future.
- Trefis estimates the segment operating profit margin to come in at 42% in FY2020, slightly lower compared to 43% in FY2019, but much higher than the 31% projected operating margin for Diageo.
Conclusion
- North America is expected to maintain its position as the largest revenue segment for Diageo in 2020.
- Additionally, though operating margins are expected to decline for the division, it would still be much more profitable compared to the company as a whole.
- Therefore, North America is expected to continue to be the primary growth driver for Diageo in the near term.
As per Diageo’s Valuation by Trefis, we have a price estimate of $170 per share for DEO’s stock.
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