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At some expense, the world’s largest liquor company is tidying its U.S. drinks cabinet.
Diageo
,
which owns Johnnie Walker, Crown Royal and other brands, said Monday it would sell 19 less successful labels to privately owned distiller Sazerac for $550 million. The deal swaps profits for growth, removing a drag on sales at the London-listed company’s important U.S. business, but also a chunk of profits.
Big consumer groups across the Western world are under pressure to revamp their portfolios.
Unilever
sold its margarine business and
Nestlé
its U.S. candy business for similar reasons. The challenge is replacing the profits lost in such deals without overpaying.
Bottles of Casamigos tequila at a restaurant in Los Angeles, Calif.
Photo:
Patrick T. Fallon/Bloomberg News
Diageo is getting three times sales for Seagram’s VO Canadian whisky, Goldschlager cinnamon schnapps and other brands. That compares to the roughly 20 times sales—up to $1 billion—it paid last year for George Clooney’s rapidly growing Casamigos tequila brand. Monday’s disposal will cut earnings per share by 2% in the next full financial year, according to brokerage Jefferies, while Casamigos won’t generate a profit for another three years.
Drinking trends explain the expensive switch. Consumers in developed markets are drinking less than they used to, but opting for pricier brands. That is why global drinks companies are bulking up the premium parts of their portfolios and why sales of cheaper liquors are suffering. The brands that Diageo is unloading sell for less than $20 a bottle, compared with around $60 for a bottle of Casamigos.
Diageo has been losing market share in the U.S. for years, even as a consumer shift from beer to liquor has boosted industry growth. Owning Smirnoff in the unfashionable vodka category is still an issue for Diageo, but the sale of other underperforming brands will still improve its prospects in what is by far its largest market. The long-term benefit to growth is probably worth a slight hangover.
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