UPDATE: As expected, Diageo's 2% decline in North America sales contributed to the company's operating profits falling 3%. Flavored spirits have both helped and hurt Diageo's sales, from disappointing performances from Smirnoff and Ciroc this past quarter to the success of Crown Royal Regal Apple, which contributed 85% of the company's U.S. growth in 2015.
- Diageo's much-anticipated half-year results, due out Jan. 28, will spell out the spirits maker's current status in the North America market, which makes up about 45% of Diageo's operating profits.
- The company's performance in North America, about 90% of which is the U.S., has been waning for the past two years, and expectations are no different for the upcoming results. But analysts believe this could be a sign of a better future ahead.
- The questionable success of the North America market puts pressure on CEO Ivan Menezes, who has included this market's turnaround as a key part of Diageo's overall growth strategy. This will also be the first interim earnings report with former CFO Deirdre Mahlan as head of the North America unit, so new strategies for this market could be announced this week.
Diageo is being hurt in particular by the lagging performance of Smirnoff vodka, which makes up a sizable portion of the company's portfolio, as increasingly more U.S. consumers are choosing brown spirits over white. Even its premium Ciroc brand hasn't been able to offset the weakening Smirnoff line, as Ciroc saw double-digit declines after new flavor extensions, even though premium spirits are becoming consumers' variety of choice.
As the whiskey market, including rye whiskey, surges in the U.S., with 7.3% growth in 2014 as compared to vodka's 1.6%, Diageo has fallen behind competitors like Brown-Forman and Beam Suntory, both of which have benefited from the increased popularity of whiskey in North America. However, Diageo has reported successes with its Crown Royal Regal Apple and premium Bulleit whiskey brands, which could be a key element in a North America turnaround.