Diageo leads race into emerging markets

Guinness brewer Diageo is leading the race into emerging markets as it serves drinkers from Moscow to Mumbai.

While Diageo has been snapping up producers of baijiu, cachaca and raki in China, Brazil and Turkey to drive sales in the world’s fastest growing economies, French rival Pernod Ricard is hamstrung by massive debts taken on four years ago to buy Absolut vodka.

Diageo’s next goal is a firmer grip on the world’s biggest tequila producer, Jose Cuervo, which would provide important access to the emerging Mexican spirits market and complement its Johnnie Walker whisky and Smirnoff vodka brands.

Both rivals make around 40% of their sales in emerging markets and analysts expect Diageo to be first to hit the 50% mark boosted by recent deals.

Diageo chief executive Paul Walsh says he is seeing faster growth in emerging markets than his rivals driven by buoyant Scotch whisky sales and expects to meet his target to get half of the group’s sales from these fast-growing markets by 2015.

“We are absolutely on track. I will be personally disappointed if we do not get there earlier,” he said.

The group is tapping into the strong growth in local spirits sold for under $10 (€8) a bottle which make up 80% of the worldwide spirits market, and which also gives it a distribution base to introduce its top brands.

Diageo’s sales grew 8% in the second half of 2011 while those in emerging markets were up 18%. This is set to be boosted further as it bought Turkey’s Mey Icki for £1.3bn (€1.6bn) and a stake in China’s Sichuan Shuijingfang last year, and Brazil’s Ypioca earlier this year.

Diageo is looking at a potential listing of its shares on the Hong Kong stock exchange to help boost its expansion plans in Asia, a company spokesman said.

Pernod’s chief executive Pierre Pringuet has ruled out big acquisitions over the next year as the company cuts debts after buying Absolut owner Vin & Sprit in 2008 for €5.7bn, but expects to hit the 50% mark within three years.

Pernod’s €9bn debt and hefty interest bill limited its free cash flow to €910.6m, while Diageo with £6.5bn of debt had over twice the cash flow at £1.7bn.

Diageo is also tapping into the trend for affluent young professionals in Asia, Latin America, Africa and eastern Europe to get a taste for spirits such as Scotch whisky.

Analyst Chris Pitcher said Diageo is entering a new era of sustained growth and expects half of Scotch industry sales this year to come from emerging markets.

Scotch is the world’s biggest international spirits category and business is booming, especially in the BRIC nations of Brazil, Russia, India and China where drinking whisky has become a status symbol among the growing middle classes. These affluent young professionals are developing a taste for Scotch and quickly moving upmarket to the more expensive single malt and luxury blends, driving Scotch industry sales up 14% in the last six months of 2011.

Both Diageo and Pernod, who control over half the industry, are investing heavily in production back in Scotland to meet the expected strong demand.