Dive Brief:
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Diageo, the world’s largest spirits company, reported net sales in its 2017 fiscal year grew 15% to reach £12.1 billion ($15.8 billion). Operating profit increased 25% to £3.6 billion ($4.73 billion), according to a press release.
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The earnings were driven by organic sales growth, favorable currency exchange rates for overseas revenues, increased productivity and the impact of cost-cutting efforts. Excluding currency impacts, organic net sales grew 4.3% while organic volume grew 1.1%.
- Diageo’s stock price hit an all-time high on the results, according to Reuters. The liquor giant's board also announced a stock buyback plan of up to £1.5 billion ($1.97 billion) during the next fiscal year.
Dive Insight:
Liquor companies like Diageo — the Britain-based maker of Johnnie Walker whiskey, Smirnoff vodka and Captain Morgan rum — represent a bright spot in the alcoholic beverages market as consumer habits are changing. Global alcohol volumes fell 1.4% in 2016, despite increased sales for spirits and mixed drinks, according to The Wall Street Journal. In the U.S., spirits sales jumped 2.6% last year, but overall alcohol sales volumes only grew by 0.1%
Changes in alcohol consumption are partly being driven by a shift in preferences among younger consumers. While alcohol penetration is staying steady among the youngest consumers, consumers aged 35-44 are increasingly turning from beer toward wine and spirits, Goldman Sachs analyst Freda Zhuo recently told CNBC. As millennials come of age and their disposable incomes rise, their penchant for premium drinks and wine is expected to increase, much to the dismay of beer manufacturers.
The results come as Diageo is cutting costs to boost margins. The company announced its cost-cutting program in 2016, with a projected cost-savings target of £500 million ($656.7 million) over three years. Diageo has recently instituted zero-based budgeting and implemented artificial intelligence in the back office to reduce costs.
The emphasis on cost savings isn’t new in the food and beverage space. With many major players struggling to achieve top line growth, companies like Diageo, Kraft Heinz and AB InBev have turned to cost savings to drive growth in their margins.
The results for fiscal year 2017 show Diageo is ahead of schedule on its cost-savings plan, with the company raising its target to £700 million ($919.4 million).
“Our productivity work is delivering ahead of expectations allowing us to reinvest in our brands, drive margin improvement and generate consistent strong cash flow,” CEO Ivan Menezes said in a statement. The company plans to reinvest two-thirds of the savings back into the business.
Like many other food and beverage companies, Diageo has grown its business through mergers and acquisitions. The company recently made a play in the fast-growing tequila category, agreeing to buy Casamigos, the fastest-growing super-premium tequila brand in the U.S., for up to $1 billion. The brand, co-founded by actor George Clooney in 2013, has been bolstered by growing demand for tequila and other spirits. Since 2002, tequila volumes have grown 106%, an average rate of 5.7% per year, according to the Distilled Spirits Council of the United States. The company says it has plans to grow the Casamigos brand internationally.
CFO Kathryn Mikells told reporters that Diageo has room to take on more acquisitions, according to Reuters.