Today I am looking at an eye-opening reason why, despite signs of slowing progress in its major markets, solid growth in emerging markets are set to thrust shares in Diageo (LSE: DGE) (NYSE: DEO.US) skywards over the long term.
Play the long game with bubbling emerging regions
The drinks giant continues to witness declining fortunes in the key markets of Western Europe, a region responsible for around a quarter of group revenues.
Just last week Diageo cut its sales and margins guidance for this division for this year and next, and said that its heavy reliance on the beleaguered markets of Southern Europe — responsible for just under half of all Western European sales — is likely to weigh on performance here for at least another couple of years.
Indeed, broker Liberum Capital warned that “the company will be hard pressed to extend its 2012-2014 consolidated targets of 6% sales growth and 200 basis point of EBIT margin gains [during the period]”, with a lack of recovery in Europe and slowing sales growth in emerging markets likely to weigh during the period.
Like most international blue-chip plays, Diageo is a favourite amongst investors seeking access to lucrative developing markets such as Latin America and Asia, where growth rates comfortably outstrip those of traditional Western economies.
But as Liberum pointed out, localised trading conditions in some parts — combined with signs of wider economic cooling — has jolted Diageo’s performance in recent times.
Still, growth here remains extremely impressive in my opinion, with the recent slowdown likely to represent a slight blip from the breakneck expansion seen previously.
In Latin America and The Caribbean, a 15% net sales improvement drove operating profit 26% higher during the year ending June 2013. In the Africa, Eastern Europe and Turkey division, net sales and profit both rose 10%, while in Asia Pacific net sales advanced 3% and operating profit by 6%.
And the company’s bloated stable of premium brands such as Captain Morgan, Guinness and Smirnoff is instrumental in driving progress in these geographies.
Last week the firm opened its first ‘Johnnie Walker House‘ in Korea to latch onto the massive whisky market there — the building, which encompasses a distillery suite, blending room and VIP area, is being used to capture clients with a taste for premium brands. The firm is aiming to operate 15 such facilities in the near future.
