Diageo: Could Africa Be The Motor For Growth?

Diageo’s Baileys Original Irish Cream – Could Africa be the motor for Baileys’ future growth?

Diageo is a leading alcoholic beverage manufacturer, producing world famous brands such as Johnnie Walker, Smirnoff, Baileys, and Guinness.

Inherently, in terms of the business the company is in, Diageo stands to gain from two factors.

First, demand for alcohol tends to be relatively acyclical. This means that demand is generally slower to respond to business-cycle downturns in comparison to other products.

Second, alcohol sales happen across varied geographies, making it easier to hedge against risks associated with any particular market. By selling in over 180 countries, poor performance in one market is generally offset by good performance in another market.

On the merit of these factors, Diageo saw revenues grow at about 4-5% and profits grow at 9% between 2009 and 2013, leading the stock value to almost double over the same period. More recently however, things have turned around for Diageo. With a slowdown in the U.S. spirits market, “anti-extravagance” in China, and unfavorable currency movements in other key markets, revenues registered a sharp 8% decline in 2014, in response to which the stock price fell almost 20%.

In a situation when traditional markets are failing, we anticipate growth for the company to come from Africa. Here are the top reasons why Africa could be the star region for the alcoholic beverage giant.

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