What’s Aiding The $685 Million Revenue Expansion For Diageo In 2020?

After adding $1.5 billion to its top line between 2016 and 2018, Diageo (NYSE: DEO), the alcoholic beverages giant, saw its revenue base shrink by about $300 million in FY 2019 (financial year ends in June). However, Trefis expects Diageo to see revenue expansion in 2020, with revenue rising by about $685 million to $17.3 billion for FY 2020. Higher revenue is likely to be contributed mainly by the North America and Asia-Pacific regions, driven by volume growth as well as higher revenue per unit.

View the Trefis interactive dashboard on Diageo Revenues for further details on revenue performance of all operating divisions of the company, where you can alter the key assumptions and arrive at your own estimate for Diageo’s revenues.

Company Overview

• Diageo is the world’s largest producer of spirits and a major producer of beer and wine, and its brands include Smirnoff (the world’s best-selling vodka), Johnnie Walker (the world’s #1 blended scotch whiskey), Baileys (the world’s best-selling liqueur), and Guinness (the world’s #1 stout).
• Diageo is the world’s largest whiskey producer with 28 malt distilleries. 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: Ultra-Premium Brands; Super Premium Brands; Premium Brands; Standard Brands; and Value Brands.

Segment-Wise Revenue Breakup

North America

• Revenue increased from $5.3 billion in 2016 to $5.8 billion in 2019, adding $0.5 billion in 3 years, with segment revenue expected to increase to $6 billion in FY 2020.
• Future revenue growth is expected to be driven by an increase in the share of scotch and growth in both Diageo Beer Company USA (DBC USA) and Canada.
• NA is likely to remain as the largest contributor of revenue with a share of 34%-35% in DEO’s revenues. Largest share is due to higher sale of its premium brands in the region which drives maximum price realization among all divisions.
• Volume sales of the segment is also expected to see a marginal uptick in 2020.

To understand what is the importance of North America in Diageo’s business, refer to our dashboard analysis which also provides insights in segment’s profitability.

Europe

• Revenue increased from $3.7 billion in 2016 to $4.1 billion in 2018 before dropping to $3.8 billion in 2019, due to slowing European economy and Brexit concerns.
• However, revenue is expected to rise to $3.9 billion in FY 2020.
• Revenue growth would be driven by strong performance in Turkey, Great Britain, Ireland, and Continental Europe. Gin is expected to be the best performing product, with Tanqueray gaining share in the fastest growing category and Gordon’s benefiting from the launch of its Pink variant.

Asia-Pacific (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 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 the relaxation in the earlier rule which banned alcohol sales near highways.
• 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.
• 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 division’s share still being the highest at 39.3%
• 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.

To understand what is the importance of Asia-Pacific in Diageo’s business, refer to our dashboard analysis which also provides insights in segment’s profitability.

Africa

• In the recent past, growth has been sluggish due to the impact of the uncertainty following the presidential election in Kenya.
• Future growth would be led by rising beer sales with strong growth of Dubic in Nigeria and the successful launch of Serengeti Lite in Tanzania.

Latin America

• Volume growth to be driven by strong performances in Mexico, PUB, and PEBAC.
• Additionally, scotch, gin, and Smirnoff continue to gain market share in the region.
• However, revenue growth to be sluggish due to volatility in revenue per unit.

Thus, the company’s near-term revenue growth heavily depends primarily on North America and Asia-Pacific, with growth Europe, Latin America, and Africa remaining sluggish.

Diageo’s expenses as a percentage of revenue are also expected to see a reduction in 2020, leading to higher margins for the year. As per Diageo valuation by Trefis, higher revenues and improving margins are the primary factors behind the $172 per share price estimate for the company’s stock.

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