Diageo has built an enviable business empire. We believe that the firm's unmatched portfolio of spirits combined with its vast distribution network, including thousands of dedicated sales people in the US, would be very difficult and expensive for any competitor to duplicate and consequently results in a wide 'economic moat'. This means it has a sustainable competitive advantage over its peer group.
Longer term, the company is making investments to grow its book of business in emerging markets such as India and China. We expect these seeds of growth will benefit investors in the long term as Diageo gains additional distribution scale in these fast-growing regions and over time as the company continues to shift additional global consumers into more premium and higher-margin brands.
In our opinion, these competitive advantages and growth prospects justify an earnings valuation above the market average.
Diageo is the world's largest maker of spirits, and the scale and scope of its portfolio is unmatched. Brands such as Johnnie Walker, Smirnoff, Bailey's Irish Cream, and Jose Cuervo are number one in the world in their respective categories. Additionally, Diageo's portfolio includes other top brands such as Guinness, Tanqueray, and Captain Morgan.
The company's position in North America is particularly strong, where it has developed a sustainable competitive advantage in its distribution network. Diageo, where allowed, has consolidated its distribution base to just one exclusive agent per state. Currently, these distributor relationships, which cover 80% of Diageo's US volume, have more than 2,800 dedicated sales people that are focused on Diageo's brands. This army of exclusive sales people is highly profitable, resulting in operating margins in North America of nearly 40%, well above the firm's consolidated margin in the high-20s, and higher than most of its competitors.
Although Diageo spent a decade spinning off noncore operating business in order to focus on the spirits industry, we note that Diageo's beer portfolio including Guinness is also important to the company, as its beer brands can serve as a gateway to spirits. This is particularly notable in driving the company's growth aspirations in Africa.
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