James Gard: Welcome to Morningstar. Our stock of the week is alcoholic drinks maker Diageo, which is putting out interim results. For those who observe dry January, the wait is nearly over.
The company has just bought Don Papa, a Phillipines firm that makes dark rum. Now there’s nothing new in Diageo buying brands to add to a portfolio that includes Smirnoff, Guinness and Johnnie Walker. But what Don Papa offers is “premiumisation”. The idea is that drinkers, especially in new wealth hot spots like Asia, the Middle East and Africa, are willing to pay more for a bottle of rum that costs 60 dollars rather than 15. Likewise tequila, gin, vodka and whisky, which have all been upscaled in recent years.
Of course calling something “premium” is another way of saying “luxury” – and Diageo also has a stake in Moet Henessey, which has a roster of upscale brands too, selling champagne and cognac. Morningstar’s recent report on the European consumer reveals how resilient the luxury sector has been in recent years. But appetite for expensive goods is likely to be tested in tougher times, we argue.
Long term, Diageo is a play on changing consumer trends as well as luxury buying in emerging markets.
Shares are now overvalued by our metrics after a decent run after the pandemic. They were pretty resilient too last year amid the wider market chaos.
For Morningstar, I’m James Gard.
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