Smirnoff owner says consumers show no signs of trading down despite high inflation
THE WALL STREET JOURNAL // JULY 28, 2022
LONDON—Diageo DEO 0.43%▲ PLC reported a surge in annual sales and profit, buoyed by a recovery in trade at bars and restaurants as well as drinkers’ growing taste for the booze giant’s high-end spirits despite surging inflation.
The owner of Smirnoff vodka and Guinness beer said Thursday it hasn’t yet seen any signs that drinkers are trading down to cheaper brands, indicating that while consumers are pulling back in some areas they are still willing to pay for high-end alcohol.
Diageo in recent years has worked to tilt its exposure toward pricier spirits brands, particularly in tequila where it owns Casamigos and Don Julio and where drinkers have shown a particular propensity to spend. That effort paid off in the past 12 months as its customers seemed relatively unfazed as the London-based company raised prices.
The company said net sales for the year ending June 30 rose 21.4%, with growth across all its regions as bars and restaurants reopened following Covid-19 related restrictions. It also said sales at liquor and grocery stores were resilient and it gained market share.
The company reported mid-single digit growth from price increases across all regions and sold a higher percentage of pricier booze such as premium scotch and tequila compared with the previous year.
Volumes rose 10.3 percentage points, with price and product mix accounting for 11.1 percentage points of the sales growth. Net profit climbed 22% to 3.25 billion pounds, equivalent to $3.96 billion.
“Our products are really an affordable luxury in the U.S.,” said Diageo Chief Financial Officer Lavanya Chandrashekar on a call with reporters. She said the average U.S. household spends about a dollar per day on spirits, buying these between six to seven times a year.
The company has been tracking weekly U.S. consumption data, Ms. Chandrashekar said, and so far sees no signs that people are trading down. While the last financial crisis resulted in some downtrading—where consumers switch to cheaper alternatives—it didn’t take long for sales of pricier alcohol to recover, she added.
The largest jump in Diageo’s volumes was in Europe, which logged a 20% rise, as consumers flocked to bars and restaurants after Covid-19 restrictions were eased in many countries. Overall, sales in Europe grew 30% on an organic basis, which strips out currency moves and M&A activity. In North America, volumes grew a more modest 3% while sales were up 14% on an organic basis.
In the U.S., Diageo said tequila grew 57% while it reported double-digit growth in scotch and U.S. whiskey. Ms. Chandrashekar said Diageo continues to face constraints in some areas on getting enough aged liquid to make its products, particularly in tequila where demand is outstripping supply.
Diageo’s ability to sell more products at higher prices stands in contrast to many consumer-goods makers selling more everyday items from snacks to shampoo, where earnings so far this quarter have shown some moderation or falls in volumes as companies raised prices.
Nestle SA on Thursday said price growth of 6.5% for the first half of the year had capped volume growth to 1.7%. Hellmann’s mayonnaise owner Unilever PLC, which also raised prices, on Tuesday said second-quarter volumes had slipped 2.1% and that it had lost share to private-label brands mainly in Europe but also some categories in the U.S. such as mainstream ice cream.
Beer giant Anheuser-Busch InBev NV, which also reported second-quarter resultsThursday, said its volumes climbed 3.4% while revenue per hectoliter was up 7.5%, helping the Budweiser owner report sales growth of 11.3%. In North America though AB InBev’s volumes dropped 2.7%.
Diageo warned that it expects net sales growth in North America and Europe to moderate in fiscal 2023—which runs until June of next year—as it comes up against the recent exceptionally strong period when many closed bars reopened fully.
Write to Saabira Chaudhuri at email@example.com
Appeared in the July 29, 2022, print edition as ‘Diageo Earnings Helped by Drinkers’ Growing Thirst for Expensive Brands’.