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Morningstar | Diageo is firing on all cylinders as pricing rebounds.

Diageo was created in 1997 following the merger of Grand Metropolitan and Guinness. Mergers and acquisitions remain part of the firm's DNA, and subsequent transactions--some transformative, others bolt-on--have established Diageo as the global industry leader. Although the industry is fairly concentrated (we estimate a four-firm concentration ratio of 0.6, above many other fast-moving consumer goods categories, including the global brewing industry at 0.5), we believe there is more consolidation to come. Outside the top five firms, the industry is highly fragmented, and local players often dominate in niche product categories or local markets. These firms present a new wave of merger opportunities for the industry consolidators, including Diageo, to strengthen their presence in emerging markets.Another incentive for Diageo to continue consolidating is the broadening of its product portfolio. Volume in the spirits industry is fairly stable (albeit more cyclical than beer), but trends are transient. For example, the current shift away from white spirits (mainly vodka) to brown spirits is a reversal of the 1990s trend. Diageo's broad presence across categories with both global strategic and local niche brands mitigates some of the risk to volume from such shifting consumer tastes and preferences. Diageo is undertaking a premiumisation strategy, which we think will be a significant long-term tailwind to both volumes and price/mix. Today in mature markets, spirits are taking share from beer and wine as consumers trade up. In both the United Kingdom and the United States, the distilled spirits category has added an average of around 20 basis points of share of throat from other categories every year for the past decade; a continuation of that trend could support Diageo's volume in developed markets, despite an underlying headwind of falling alcohol consumption. With regard to price/mix, the way Diageo has laddered the pricing structure of brands such as Johnnie Walker demonstrates that there is almost unlimited scope for premiumising some of the core brands in the portfolio, a luxury that most consumer staples companies do not share.