How Important Is Asia-Pacific For Diageo’s Growth?

January 7th, 2020 by Trefis Team
+13.91%
Upside
140
Market
160
Trefis
DEO: Diageo logo
DEO
Diageo

Asia-Pacific (APAC) is expected to be the fastest growing segment for Diageo (NYSE: DEO) in the near term. Diageo’s revenues (shows Diageo’s key revenue components) have increased from $15.4 billion in FY 2016 to $16.6 billion in FY 2019, adding about $1.2 billion in three years. During the same period, the APAC segment added $0.4 billion in revenue, accounting for 35% of the increase, whereas the other four divisions (North America, Europe, Africa, and Latin America) together made up the other 65%.

View our interactive dashboard – What Is The Importance Of Asia-Pacific In Diageo’s Business? – to understand APAC’s volume, revenue, and profitability trends and its importance to the company as a whole.

Division Overview

Relevant Articles
  1. Does Diageo Stock Have More Room For Growth?
  2. Up 16% In A Month, Will Diageo Stock See Higher Levels?
  3. Should You Buy Diageo Stock At $175?
  4. What’s Happening With Diageo Stock?
  5. Should You Buy, Sell, Or Hold Diageo Stock Around $175?
  6. What’s Next For Diageo Stock After A 10% Fall In A Month?

What Is On Offer?

  • Asia Pacific (APAC) comprises South East Asia (Vietnam, Thailand, Philippines, Indonesia, Malaysia, Singapore, Cambodia, Laos, Myanmar, Nepal, and Sri Lanka), Greater China (China, Taiwan, Hong Kong, and Macau), India, Travel Retail – Asia and Middle East, Australia, and North Asia (Korea and Japan).
  • 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.

Revenue Trend

  • APAC revenue increased from $3.1 billion in 2016 to $3.5 billion in 2019, adding $0.4 billion in 3 years.
  • Future revenue growth ($0.2 billion addition in 2020) is expected to be driven by an increase in the share of scotch, along with strong growth in China and India.
  • Sales in India are expected to rise due to relaxation of the earlier rule which banned alcohol sales near highways.

To understand how other operating segments have performed, please refer to the Trefis analysis- Diageo Revenues: How Does Diageo Make Money?

Volume Share

  • APAC’s volume sales continuously declined from 104 million units in FY 2016 to 91 million units in FY 2018, before rising to 95 million in FY 2019.
  • Despite this decline, APAC has been the largest contributor to Diageo’s volume sales historically, though its share went down from 42% in FY 2016 to 37.6% in FY 2018, before rising to 38.7% in FY 2019.
  • Higher demand in China and India, along with strong growth in Australia is likely to drive volume sales back to 100 million units in FY 2020, with the division’s share still being the highest at 39.3%.

Revenue Share

  • Though APAC contributes close to 40% of Diageo’s volume, the segment only makes up about 20% of the company’s total revenues.
  • This is mainly due to other divisions like North America and Europe being driven by premiumization, i.e. the revenue per unit is much higher.
  • APAC has the lowest revenue per unit among all of Diageo’s divisions.
  • However, with rising revenues, APAC’s share in total revenues has also increased from 19.8% in 2016 to 20.9% in 2019.
  • This metric is further expected to rise to 21.4%, as APAC is likely to be the fastest growing segment for Diageo.

Profitability

  • Segment margins have historically been lower than the company’s margins as a whole.
  • Though segment margins are rising at a healthy rate due to positive price/mix and productivity savings, APAC’s margins are expected to continue to be lower than the company’s, though the gap is narrowing at a fast rate.
  • APAC’s operating margin increased from 16.8% in FY 2016 to 24.9% in FY 2018, as against a modest rise from 27.3% to 31.4% during the same period for the company as a whole.
  • For FY 2020, APAC margins are expected to be around 25.7% as compared to Diageo’s 31.2%.

Conclusion

  • APAC is expected to remain the largest volume driver of the company.
  • At the same time, margins are expected to continue improving even though Diageo’s margins are set to drop in 2020.
  • Thus, rising volume, increasing revenue, and a narrowing profitability gap is set to help APAC remain a significant growth driver for Diageo in the near term.

 

What’s behind Trefis? See How it’s Powering New Collaboration and What-Ifs

For CFOs and Finance Teams | Product, R&D, and Marketing Teams

More Trefis Data

Like our charts? Explore example interactive dashboards and create your own.