What Could Drive $3.6 Billion Revenue Loss For Diageo In 2020: North America Or Asia-Pacific?

Diageo’s (NYSE: DEO) North America segment has seen revenues grow from $5.3 billion in 2017 to $5.8 billion in 2019, though we expect the revenue to plunge over 22% ($1.3 billion) to $4.5 billion in 2020. The segment is expected to be the biggest contributor (36%) to Diageo’s projected total revenue loss of $3.6 billion in 2020, as we detail in our interactive dashboard Diageo Revenues: How Does DEO Make Money?

The $0.5 billion segment revenue addition during 2017-2019 can be largely attributed to an increase in the share of premium scotch and growth in both Diageo Beer Company USA (DBC USA) and Canada. Overall economic growth and rising consumption bolstered the segment growth. However, 2020 is likely to be challenging for Diageo’s North America division, as it will be for several food and beverage companies. Consumer spending is expected to be sluggish in 2020, due to the impact of COVID-19, as the current pandemic is taking a toll on the economy, which is feared to go into recession. More than 20 million people in the U.S. have lost their jobs in April, marking the most rapid and largest decline ever (since 1939, when the government started collecting data). Rising unemployment and partial employment have led to a drop in consumer spending power, in turn driving a sharp drop in volume sales. With the U.S. currently being the most affected region due to the current pandemic, the company’s sales in the North American segment could be affected the most, with the projected revenue loss possibly going to as high as $1.3 billion.

In contrast to North America, Diageo’s Asia-Pacific (APAC) segment is expected to be the saving grace for the company, with the segment expected to take a hit of $0.5 billion in 2020, lowest among all divisions. Though coronavirus originated in China, Asia-Pacific has not been as affected as the US and Europe due to the crisis. However, the revenue decline in APAC is also expected to be driven by lower consumer spending and supply disruptions due to the lock down. Additionally, with online sale of liquor still being illegal in Diageo’s large markets like India, such regulations are also likely to take a toll on revenue despite a part of consumers willing to pay for the product. As such, 2020 is going to be challenging for APAC as well, as we detail in our interactive dashboard on 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 liquer), 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 in North America, Europe, Latin America, Africa and Asia-Pacific. 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.

Diageo reported $16.6 billion in total revenues in FY 2019. This includes 5 operating divisions-

• North America: $5.8 billion (35% of FY2019 total revenues)
• Europe: $3.8 billion (23% of FY2019 total revenues)
• Africa: $2.1 billion (12% of FY2019 total revenues)
• Latin America: $1.5 billion (9% of FY2019 total revenues)
• Asia-Pacific: $3.5 billion (21% of FY2019 total revenues)

Overall, all of the Diageo’s segments are expected to face headwinds in the near term, though North America could be the worst hit, in our view. Diageo could lose over $3.5 billion in total revenue in 2020. This compares favorably with rival Anheuser-Busch InBev expected to lose about $7.7 billion in revenues in 2020.

The current crisis and expectation of sharp decline in revenues has led to Diageo’s stock losing more than 38% of its value within 3 months, as the stock price fell from $167 at the beginning of 2020 to $103 on 23rd March 2020. Though the stock has partially recovered to $140 as of 11th May 2020, it is still 20% lower than its 52-week high of $179. As per Diageo Valuation, Trefis has a fair value estimate of $147 for Diageo’s stock.

Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.

Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. Additionally, the complete set of coronavirus impact and timing analyses is available here.

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