Diageo PLC (LSE:DGE) boosted US spirits growth in the second half of its financial year, but Deutsche Bank said most of this growth has been in 'flavour extensions', which historically has proved to be very short-lived.
There is a risk that the recent acceleration can’t be sustained, the bank warned.
Analysts at UBS chipped in that Diageo’s tequila brands are also facing a structural downtrading in the Blanco premium sector.
Blanco accounts for around half of the tequila market with the super-premium end, costing US$50 a bottle or more, half of that again.
Super premium is now declining after seeing 17% annual average growth between 2020-23, while premium ($25-30) has also seen growth slow.
“We think this downtrading could be structural, particularly when seen in context to the historical evolution of the Vodka category,” says UBS.
As a parallel, the Swiss bank points to the 2000s vodka 'premiumisation' boom that was fuelled by a flight to premium brands.
As the category's growth slowed and consumers became more knowledgeable about vodka, premiumisation ended and "the category's low barriers to entry and limited taste differentiation were exposed”.
Diageo's tequila portfolio amounts to 12% group sales and 30% in the US with the the super-premium Blanco variants Casamigos and Don Julio accounting for 40% of the total franchise.
“Such a drag on the portfolio makes it harder for Diageo to grow its portfolio in line with the US industry.”
Sell Diageo is the conclusion of both UBS and Deutsche Bank (tp 2,400p).