Diageo Cheers Rising Spirits Demand: More Growth In Store?

Diageo (LON:DGE) plc (NYSE:DEO) , one of the prominent players in the U.S. alcohol industry, seems to be cheering on favorable market trends. Diageo, like most companies in the alcohol space, is benefiting from steadily surging demand, a stable U.S. economy and constant innovations to suit the changing tastes of consumers.

Driven by such strong fundamentals, Diageo has emerged into a preferred pick for investors. Evidently, shares of this Zacks Rank #2 (Buy) company surged 35.5% in a year, compared with the industry’s rally of 22.8%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Further, we expect this alcohol giant to continue on its growth path, backed by strategies to augment offerings and expand business reach.

Acquisitions Aid Growth in the Spirits Category

The spirits segment, amongst other alcohol categories, is gaining much traction as consumers are inclining toward flavored whisky, premium tequilas and other spirits.

Notably, Diageo has also been striving to augment its spirit-based alcohol portfolio through acquisitions. In June 2017, the company announced the acquisition of the fastest-growing premium tequila brand, Casamigos, in a deal worth $1 billion. This buyout is likely to strengthen Diageo's market share in the tequila category along with the existing Don Julio brand. Also, the company will capitalize on its presence in the high-growth international markets. Other noteworthy acquisitions in this segment include United Spirits Limited, De Leon Comb Wine & Spirits, Shui Jing Fang and Halico.

The booming spirit segment trend has also been aiding other alcohol manufactures like Brown-Forman BF.B and Constellation Brands (NYSE:STZ) . Further, companies like Boston Beer Company (NYSE:SAM) have been taking advantage of the growing demand, by adding products to their portfolio.

Focus on Emerging Markets and High-Margin Brands

Like most multinationals, Diageo has been focusing on expanding in the emerging markets. It is the leading international spirits company in markets of Africa, Latin America and Asia. Moreover, the company has been successful in the emerging regions by catering to local tastes. Products like Johnnie Walker and Blue Label have been customized according to the local palate in China, India, Thailand, Vietnam, Brazil and Mexico.

Further, Diageo emphasizes on high-margin products as they have been depicting strong growth globally. During first-half fiscal 2017, the company’s premium brands delivered growth of approximately 6% while the super deluxe brands rose 5%. In accordance with this strategy, management resorted to disposing less productive brands and non-core assets.

Bottom Line

Diageo has been witnessing unfavorable trends in the beer category. Nevertheless, robust growth in the spirits segment is expected to more than offset dismal beer sales in the forthcoming periods. Also, the company’s consistent efforts to progress in the alcohol industry by adapting with evolving trends look promising.

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