Diageo(LSE: DGE) (NYSE: DEO.US) has a drinking problem: vodka.
Diageo owns the worlds most popular vodka brand, Smirnoff, but consumers are losing interest. They are now changing their buying habits, and brand loyalty is evaporating as new brands of vodka hit the market. Whats more, affluent consumers are now moving away from Smirnoff, towards premium vodka brands.
For example,during 2012the global vodka market reportedly managed only 0.3% growth, although premium vodka sales jumped by 7.6%. Whats more, over the past decade,flavoured vodka has steadily grown in importance, from around 7% of the market during 2001 to 21% by2013.
However, rising competition and changing consumer habits have put the brakes on flavoured vodkas growth; in fact, the category is now shrinking.
Changing market
Many consumers are now turning away from vodka to other spirits, namely whiskey, although currently the global demand for vodka is still rising.
Its predicted that the global whisky market will have surpassed vodka in terms of size by 2018, which is both a troubling trend for Diageo and great news.
You see, Diageo is not only one of the worlds largest vodka manufactures but it is also one of the worlds largest whiskey producers as well.
Still, the trend away from mid-range products and towards premium products is concerning, and this is where Diageo is likely to suffer.
Moving with the times
In an attempt to keep up with the changing market, Diego is shuffling its product offering, moving upmarket.
One of these, upmarket swaps involved thesale of theBushmills whiskey brand to Jose Cuervo Overseas for $408m. At the same time, Diageoinked a deal with the owners of Tequila Cuervo la Rojena SA de CV to gain full control of the upmarket tequila brand Don Julio.
Other moves by the company include the launch of itsnew single grain whisky, HAIG CLUB, the launch of a premiumgin that uses Japanese botanicals with the addition of sake and the increased marketing of the groups upmarket vodka brand, Ciroc. Theres also theDiageo and Combs Wine & Spirits joint venture, which recently launched the luxuryDELEON Tequila brand last month.
Diageo really is firing on all cylinders, using its existing portfolio of well-established products to fund the development of premium beverages to attract consumers attention. The company is also working with bartenders to streamline its offering, as well as well as quizzing bar staff for new spirit ideas.
Moving forward
So, Diageo is doing everything it can to reduce its dependence on vodka, move upmarket and boost sales. And Diageo is also a highly defensive investment, the company’s portfolio of world leading brands are worth billions and give the group a solid platform from which to build on.
For this reason, Diageo is perfect share for you to tuck away in your retirement portfolio and forget about.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
