Jonny Forsyth, Mintel’s Global Drinks Analyst, spoke today with CNBC to discuss Diageo’s earnings. Here, he outlines the company’s current success and the challenges that lie ahead.

Diageo boosted better than expected results

Today, Diageo reported positive results after a couple of years of relative stagnation. The drinks giant reported organic net sales growth of 4.4% in the six months to 31st December. Most pleasing is that Diageo’s largest market, North America, recorded an organic net sales rise of 3% compared to the same period last year. The group also saw eye-catching 11% organic net sales growth in Latin America and the Caribbean, and also very solid results in the challenging Europe region (+5%).

Brexit has short-term advantages — but what about the long-term?

Diageo understandably refrained from focusing on some of its huge challenges going forward as it seeks to grow its profits and maintain its position as the biggest spirits company in the world. For example, Diageo has gained significantly from the short-term blow-back from Brexit. The UK’s decision to exit the EU has resulted in a fall in the value of the pound, which has hugely benefitted Diageo, a UK-based company that makes over 90% of its sales from exports.

Less clear is whether Brexit will work for Diageo in the long-term. The company was vehemently anti-Brexit prior to the referendum because of its concern about losing valuable control over favourable trading conditions for its main export, Scotch, which accounts for nearly a quarter of Diageo’s business.

Diageo’s CEO Ivan Menezes was quoted in The Spirits Business as arguing that: “EU membership is very important for us, and it’s very important for Scotch whisky. It’s easier to trade in the EU and around the world. Scotch relies on getting trade agreements around the world”. The EU is currently negotiating reduced spirits tariffs for spirits sales in India. Diageo has made a big bet on Indian growth and was hoping an EU deal would allow it to accelerate its penetration of this tricky but exciting market.

Navigating the rise of craft and health trends

Another risk-factor to Diageo is the rise of craft spirits which currently account for less than 1% of global spirits sales. However, like craft beer, this segment is growing rapidly year-on-year, much faster than total spirits.

Diageo’s business model has been all about developing big, hyper-global spirits brands such as Johnnie Walker and Smirnoff. Yet, craft is driven by a consumer who is seeking the opposite; brands which are small-batch, local and quirky. This requires a big shift in approach from Diageo which may take time to master.

Health and wellness trends are another threat. In North America and Europe especially drinkers are seeking quality over quantity, which is in some ways an advantage for Diageo’s premium brand strategy. Yet, it also means that spirits producers are losing – and will continue to lose – consumers to non-alcoholic drinks. Again, can Diageo react and broaden their business portfolio enough to respond to such challenges?

Ultimately, the future looks positive for Diageo which has always prioritised long-term growth over short-term gains, but success is also more precarious than many will assume from today’s results.

Jonny Forsyth is Mintel’s Global Drinks Analyst, responsible for researching and writing all of Mintel’s UK drinks reports. He brings ten years of experience working in the marketing industry, with roles at Starcom Mediavest, AB-Inbev, and Trinity Mirror. He is a regular contributor in global and national media outlets such as BBC, CNBC and Bloomberg.

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