Americans are spending more on expensive booze

Americans are 'drinking better': Diageo CEO
Americans are 'drinking better': Diageo CEO

Americans are drinking more expensive booze, in particular tequila and whiskey, the boss of spirits maker Diageo told CNBC, after the company reported full-year earnings on Thursday.

The maker of Smirnoff vodka and Johnnie Walker whiskey said that organic net sales were flat in the year ending June 30, following a tough 12 months as the drinks maker continued to nurse a hangover in some of its markets and spirit categories.

North America has been a tough market for the London-headquartered drinks giant, with volume declining 3 percent and net sales dropping 1 percent.

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But Diageo's chief executive said he was confident the region would recover as Americans take to higher-end spirits.

"They (Americans) are drinking better in whisky, in vodka, in tequila," CEO Ivan Menezes told CNBC in an interview on Thursday.

"But we've got a portfolio that covers the whole breadth of price points and you will see us activate our brands, be it Smirnoff or Ciroc…but Americans in general are drinking better and that bodes very well for us because we are very well positioned in the premium end of the business."


Profit before tax ticked up 8 percent to £2.93 billion from the previous year.

Diageo announced in its earnings release that it would acquire the remaining 50 percent stake in premium tequila brand Don Julio.

In North America, this tequila saw a 5 percent rise in volume. Buellit, a high-end bourbon, saw a 32 percent surge in volume, while volumes in the premium Ciroc vodka rose 4 percent.

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"The trend to drinking better is a global one, but it's very strong in the U.S. and it's there in a sustained way," India-born Menezes said.

Diageo also plans to invest $400 million in Mexico.

Despite the flat overall sales for the group, Diageo's chief executive was bullish on the outlook for next year, saying the FTSE 100-listed company had "never been fitter."

"In the results you've seen we've had strong cash flow, we kept the dividend growth at 9 percent reflecting our confidence in the business, expanded operating margins, we've grown market share," Menezes said.

"As we look forward I am confident about strong and sustained growth and that's why we've put in our outlook that fiscal (year 20)16 will be stronger than fiscal 15 and as we get into fiscal 17, this business has the runway to deliver mid-single digit growth, good margin expansion, good cash conversion, and continue to do that in a sustained way."

The Asia Pacific region saw a 2 percent decline in sales but China—a market that has caused pain to drinks makers in the past due to an anti-corruption drive—appeared to be turning around. Diageo's sales in the world's second-largest economy increased 15 percent, driven by the success of The Singleton whiskey brand.

Africa was another bright spot, with volumes up 7 percent and net sales 6 percent higher in the year. Latin America showed further trouble, however, with volumes and net sales both down.

In terms of drinks categories, North American whiskey was one of the top performers with sales up 12 percent globally, and Tequila saw a 14 percent surge in sales. Sales of Scotch, however, fell 5 percent over the year.

SEC investigation

by the U.S. Securities and Exchange Commission for "channel stuffing"—where a company ships excess and unwanted product and then records the increased sales to boost revenue.

On Thursday, Menezes confirmed the investigation was taking place and that it was working with the regulator.

"We have received an information request and we are fully compliant with it…we take this very seriously. But I would also say, I'm very proud of Diageo's values, the way we do business, our standards," Menezes told CNBC.

Takeover bid?

Last month, reports suggested that Brazil's richest man Jorge Paulo Lemann, who founded private equity firm 3G Capital, was in talks with executives .

Diageo's boss did not deny talks were ongoing, but said that his focus was on strengthening the company.

"Obviously I can't comment other than to say we know our disclosure requirements. What I would say is I'm all about making this strong company even stronger and widening our competitive lead," Menezes said.

Lemann already has a stake in Anheuser-Busch InBev, the world's largest brewer.