Author | Grove Hayekist
Data support | Pythagorean Big Data
The advantages of the brand companies in which the chucks (price investors) prefer addictive consumer goods are self-evident: (1) consumers are loyal to the brand, and the marginal cost of customer acquisition costs is constantly decreasing; (2) repeated consumption will bring endless demand. Guizhou Moutai is undoubtedly the leader of this type of company, so it brings rich returns to investors.
There is a company in the Shanghai-London Stock Connect that can barely compete with Moutai - Diageo. Originally from the United Kingdom, the company is one of the world's largest alcoholic beverage companies listed on the New York (DEO) and London Stock Exchange (DGE.L) and has a range of top liquor brands spanning distilled spirits, wine and beer. According to the 2019 Global Spirits Market Research Report, Diageo ranks first in the top 15 companies in the global spirits market.
1
The toiling Diageo
On closer inspection, Diageo is really hard work compared to Maotai.
Human beings love wine, and there is no need to talk about it, but the tastes are very different. Moutai is faced with a population of 1.4 billion people with the same culture, similar habits and similar pursuits, which is a great blessing, so it can easily sell 100 million bottles of wine a year, easily achieve an operating income of 77.19 billion yuan, and obtain a stunning net profit margin of 51.37% (2018 annual report data), corresponding to a net profit of 35.2 billion. 38% of all alcohol consumption is Chinese liquor.
Diageo, on the other hand, toiled to sell more than 200 kinds of liquor in more than 180 countries around the world, but only achieved a net profit margin of 17.06%. Diageo's fiscal year 2018 generated revenue of £12,163 million (105.7 billion yuan at the latest exchange rate of 8.7 billion) and a net profit of just £3.16 billion (Wind converted to 26.1 billion yuan).
This may be a good revelation for Moutai. Category diversification and brand diversification do not necessarily significantly improve profitability, but rather increase management risk. Diageo faced a small domestic market and had to pursue growth without expanding globally. Moutai does not seem to need this for the time being, as long as the brand is maintained, the production capacity is steadily expanded, and the quality of Moutai wine can be achieved for a long period of time, at least before the endogenous growth potential of the Chinese market is not exhausted.
The domestic market is still very large, according to the research data of Guanyan Tianxia, in 2018, China's liquor sales volume was about 6.076 million tons, but the market concentration was very low, Guizhou Moutai sold 32,500 tons in 2018, although it occupied 63.5% of the market share of the high-end liquor market, but the full market share was only 0.53%. The future trend is that the total sales volume of liquor may decline, but due to the increase in per capita disposable income and the release of the demographic dividend (in the next few years, more than 10 million people in China will reach the legal drinking age every year, which will bring incremental demand to the market), and there is still room for the market share of high-end Moutai to increase. As long as production and selling prices do not fall at the same time, then Moutai has the ability to continue to grow while maintaining high gross and net profit margins. Diageo already occupies 30% of the world's spirits market share, and there is little room for it to continue to expand its share under the premise of improving quality and efficiency.
2
Rich product line and strong brand operation
1. Product line
Diageo sells spirits and beers and has a range of iconic brands, including:
Smirnoff (Crown) - The World's No. 1 Vodka Johnnie Walker - World's No. 1 Scotch Whisky J&B (Jumbo) - World No. 2 Scotch Whisky Bailey's (Bailey's) – World's No. 1 Liqueur Container Morgan (Captain Morgan) – World No. 2 Rum Jose Cuervo Gold & Silver (Handsome Gold Happy and Silver Happy) - the world's first tequila Tanqueray (added) - the United States' first imported gin Guinness (Guinness) - the world's first dark beer
In fact, Diageo operates as many as 200 brands, all of which have their own connotations, or in one place, or in one country, or even in a global reputation. The world's top 7 spirits champion brand, Diageo according to three.
2. Brand operation
Diageo was founded in 1997 by the merger of Grand Metropolitan and Guinness. The merger of the two is a large gathering of the wine industry, and the powerful diageo has become one of the world's top two liquor companies. Since both companies serve high-end customers with high-end brands, there is a clear synergy between the two, and the integration of channels alone, that is, the reduction of marketing costs, has brought scale effects to Diageo. At the same time, Diageo sold its non-core business and low-margin business on a large scale in order to better focus on the development of the liquor business. By 2003, the company's net profit margin level reached 24.8%, which was a significant improvement compared with the net profit margin level of about 8% before the merger of the two companies.
After the improvement of cash flow, Diageo launched mergers and acquisitions around the world, mainly in two dimensions. One is to consolidate its global market share of whisky; the other is to acquire the most popular spirits brands around the world, enter the local market in a way that is not resisted by consumers, and then use its management experience and channel capabilities of centuries-old and tens of billions of companies to create performance growth for themselves.
Diageo is a new term and brand created after the founding of the company, the first half of Diageo's root is the Latin meaning of "day", the second half of the root of the word in Greek means "earth", meaning to provide pleasure to the world every day. In terms of the essence of the business, Diageo is a brand operation company similar to Procter & Gamble, which has almost strict regulations for all its brands, from details to product display. In the case of Johns Bonnie, for example, if there is any change in the packaging, it must be personally approved by the company's general manager.
On the one hand, Diageo is very good at promoting global creativity, such as sponsoring F1 events to lead the development of the global spirits market. As a long-time advocate of the liquor brand "rational drinking", Diageo describes rational drinking as a part of life such as recreation, leisure and social life in its advertisements, aiming to promote a responsible way of drinking to consumers. This is a value, a philosophy of consumption and a corporate image that they are trying to implant in the minds of consumers around the world.
Diageo, on the other hand, pursues the integration of its brands into the cultural flairs of different countries in order to achieve maximum growth in localization. By investing a lot of manpower and material resources in each market, to develop marketing strategies suitable for the local market, find British methods in the UK, find Chinese methods in China, and constantly learn and constantly revise. Because the successful experience of one market cannot be simply ported or copied to other markets and achieved the same success.
3
Strong financial performance
1. The sales growth rate is higher than the global average
According to data released by The Spirits Business (hereinafter referred to as TSB), a well-known British liquor and beverage media, the total global spirits sales in 2018 were about 2.42 billion cases, an increase rate of 1.1%. Among them, the total sales volume of whisky categories (including Indian "whisky", world whisky and Scotch whisky) was about 375 million cases, an increase rate of 2.8%.
According to the first half of fiscal 2019 (July-December 2018), Diageo's organic net sales grew by 7.5%, higher than the previous nine-year history. Organic net sales grew by 5% in the full fiscal year of 2018.
2, not inferior to the ROE of Moutai
Similar to Moutai, Diageo consistently maintains a very high level of shareholder returns and very strong free cash flow. The table below is as follows
Diageo is also very generous to shareholders and unanimously and actively dividends, with a cumulative dividend of 294.8 pence in the past 5 years.
4
Valuation logic
Diageo's share price on the London Stock Exchange rose 22.25 times (excluding dividends) in 31 years from 157.41 pence on August 28, 1988 to 35,503.50 pence on August 25, 2019, or 10.52% of the compound annual return, which is still attractive.
1. Room for growth
The investment value of Diageo lies in the high predictability of its business model, for the simple reason that there are several points: (1) consumer drinking is a tradition and habit that is difficult for human beings to change in the short term, and the demand side will not fluctuate greatly; (2) the demand for high-end spirits has a significant elasticity to global per capita GDP, that is, with the rise of global per capita GDP, the total demand for high-end spirits is expected to rise steadily; (3) the global demographic dividend is still released in the future, mainly from India, Vietnam and other countries in Asia and Africa. Diageo forecasts that 730 million new consumers will be able to afford international premium spirits over the next 10 years; (4) historically, the nominal price of premium spirits will not lag behind global inflation, i.e., there is reason to believe that Diageo's medium- to long-term (5 to 10 years) net organic sales are expected to grow at a rate that exceeds the growth rate of global nominal GDP.
2. Relative valuation
Judging from the valuation system of the world's major wine companies, Diageo currently has the lowest TTM-PE. This is certainly an implied low profit growth rate, but it also represents a certain degree of security.
Because Diageo's operation has a highly stable expected basis (if the business is unstable, the DCF model has no meaning), so there is a certain rationality in using the DCF model. Moreover, it is very convenient that the company has been disclosing shareholder free cash flow data, making the calculation of the model much simpler. Here are the assumptions and parameters set:
(1) Discount rate of 8% ;(2) The global economic growth rate forecast by the IMF in 2019 is expected to be 3.2% as the growth rate of free cash flow of Diageo shareholders in the next 10 years; (3) the perpetual growth rate after 10 years is 2.5% (estimated by scratching the head).
The resulting market capitalisation is £45.022 billion, which is about 54% of the current market capitalisation of £83.1 billion. This should satisfy the margin of safety for the most conservative chucks.
For companies like Diageo, the predictability is strong, but the lack of explosive growth can be used as an important target for reverse investment. If you encounter a systematic plunge in the market and buy under the market value of 60 billion pounds, the future returns will not be lost to the market.