Dive Brief:
- Diageo is selling 19 brands in its portfolio to Sazerac for $550 million and will return net proceeds of about £340 million ($441 million) to investors through share buybacks, according to a press release. The owner of Guinness, Smirnoff vodka and Johnnie Walker whisky said the sale would allow it to focus on its premium brands in the U.S.
- Sazerac — one of the U.S.'s oldest family-owned distillers — will get a variety of brands including Seagram's whiskey, Romana Sambuca and Booth's gin. Diageo also agreed to 10-year supply contracts with Sazerac for five of the drinks it's selling.
- "Diageo has a clear strategy to deliver consistent efficient growth and value creation for our shareholders," Diageo CEO Ivan Menezes said in the release. "The disposal of these brands enables us to have even greater focus on the faster growing premium and above brands in the U.S. spirits portfolio."
Dive Insight:
This move is a big step in Diageo's plan to refocus its portfolio on premium products with potential for growth and boost slowing sales. It wasn't a surprise deal, since Diageo announced back in May that it was looking to offload some of its American brands. At the time, the global spirits powerhouse was looking to bring in between $500 million to $1 billion for the brands — and this deal is on the lower end of that goal. But it will bring in a good amount to shareholders and help in its pivot to concentrate on its core premium labels.
With this sale, the alcohol giant was looking to purge brands that consumers are leaning away from, and trim down to drinks that they want. Diageo saw slower growth in its earnings earlier this year when the company reported a 1% decline in volume growth from the year before — although it still saw global sales increase by 0.9% and operating profits up 3.7%.
Diageo’s finance chief Kathryn Mikells told The Wall Street Journal that the 19 brands it is selling are products that have seen declines and are mainly on the low end of the market for them.
"People are not drinking more, they are drinking better," she said.
This strategic plan to trim down to just the high-end alcohol comes at a time when interest in strong liquor has increased, particularly among millennials. A survey found that millennials drink more hard alcohol than Generation X and baby boomers. Additionally, millennial interest in vintage cocktails has revived retail sales of spirits like tequila, whiskey and bourbon — while beer volume has declined for five years straight.
The company is also making moves to upgrade its portfolio. Two years ago, the alcohol powerhouse sold several of its wine brands to Treasury Wine Estates for $552 million. And last year, Diageo bought Casamigos, the fast growing premium tequila brand in the U.S., for up to $1 billion. That acquisition allowed the company to add a top tequila product to its now refined portfolio to offset the sale of these 19 brands.
While Diageo will be concentrating on its more premium brands, it's not without struggles. Studies have shown that millennials don't have strong loyalty to alcohol brands and seek out new innovations, so Diageo is looking to capitalize on new trends as well. Earlier this year, Diageo was in talks with at least three Canadian cannabis producers about a deal for a pot-infused drink. Other alcohol brands have made similar moves this year, with Constellation selling off its wine brands to focus on cannabis products.
A deal still hasn't been announced for Diageo and a CBD producer, but it could come soon given that Diageo just entered into this sale agreement and more states in the U.S. are looking at marijuana legalization. Diageo expects to complete this sale early next year. As Diageo offloads these brands, it could also look to pick up more high-end products as it grows and focuses its premium brands portfolio in the U.S. and around the world.