The world’s largest spirits company, Diageo Plc will sell off most of its wine assets in the United Kingdom and United States of America to Australian winemaker, Treasury Wine Estates (TWE) for a reported $552 million.
Ivan Menezes, Chief Executive, Diageo, believes the sale will enable the company to focus on core components. He said; “Diageo’s strategy is to drive stronger, sustained performance through focus on our core portfolio and today’s announcement is another element of that strategy in action. Wine is no longer core to Diageo and this sale gives us greater focus.”
This decision came on the heels of the slump in wine sales. The assets to be sold include the United States based Chateau and Estate Wines and the British based Percy Fox businesses. Earlier, Diageo sold its 57.87 per cent stake in Red Stripe beer and its 49.99 per cent stake in GAPL to Heineken.
New York Post notes that Diageo’s sale of some of its beer stakes shows that the company was not happy with its beer portfolio. However, Diageo has said the company will likely gain a unique profit after tax of about 440 million pounds. TWE hopes the acquisition of Diageo’s wine stakes will prove to be a sales boost for their U.S brands and increase the company’s growth in the U.S., Canada, Asia and Latin America.
Diageo in recent times have recorded low profit from wine sales, mostly due to China’s economic slowdown. Last month, Diageo CEO, Ivan Menezes noted that the company may be taking a $150 million hit due to currency weakness. He said “Our outlook for this financial year included the possibility that further currency weakness could impact demand for premium spirits in the emerging markets”.
Also, analysts note that there has been a recent decline in wine sales in Diageo. The chart below shows a depreciation in wine revenue between 2010 and 2014.
Countries such as France and Italy have recorded a 3.7 percent and 18.1 percent individual drop in sales. The sale of Diageo’s wine stake may not have a remarkable effect on its profit margin because wine revenues only account for about 4 percent of Diageo’s net sales.
