Diageo's Wine Adds More Flavors

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Diageo Plc. (DEO) recently announced that it is expanding its Chateau & Estate Wine portfolio by adding three more varieties: Stark Raving, Butterfly Kiss and Rose'N'Blum.

The company expects to distribute them throughout the U.S. by the end of summer 2012. The new flavors are targeted towards young wine lovers preferring non-traditional tastes.

Stark Raving wine labels have two variants -- Stark Raving Red and Stark Raving White. The winemaker of Star Raving wines also plans to add a Malbec variant from Argentina and a French Cabernet to the brand's line up.

Butterfly Kiss wine labels offer brands like Chardonnay, Pinot Grigio and Pink Pinot Grigio. Another flavor called Mosato is scheduled to join the lineup soon.  As for Rose'N'Blum, it offers brands like Rose'N' Blum Pinot Grigio and Pink Moscato.

Diageo’s Chateau & Estate Wines manufactures and markets premium wines from vineyards around the world, including Napa Valley, Sonoma, the California Central Coast, Argentina, France, Italy, New Zealand and Australia. Diageo Chateau & Estate Wine also imports Bordeaux and Burgundy estate-bottled wines.

Apart from wine, Diageo’s collection includes a wide range of brands across spirits, including Johnnie Walker, Guinness, Smirnoff, Baileys, Cuervo, Tanqueray, Captain Morgan and Crown Royal.

The company is on an expansion spree to boost its spirits portfolio, and has announced an investment plan in Scotch whiskey production. As a part of the investment plan, Diageo plans to build a major new malt distillery and also expand its existing ones. New warehouses are scheduled to come up to store the extra amount of spirit that will be brewed as a part of the expansion plan.

In June 2012, Diageo bought Cabin Fever Maple Flavored Whiskey, a move that will allow the company to tap the growing markets of flavored whiskey and craft distilling.

Diageo started its new restructuring program in fiscal 2011. Under the program, Diageo is reviewing its operating model with an objective to improve the effectiveness and productivity of the group's operations and deploy resources closer to the market as well as in the geographical regions where the potential for growth is highest. We are optimistic regarding the effectiveness of the model once it becomes operational by June 2013.

However, the recent economic uncertainty has adversely affected Diageo, as customers are opting for lower-priced brands over premium ones. The effect due to this change in consumers’ spending pattern was reflected through the company’s weak performances in Nigerian and European markets during the first half of fiscal 2012. A sluggish recovery in these markets is expected to negatively impact the demand for Diageo’s premium offerings and in turn affect its top-line growth.

Diageo closely competes with Molson Coors Brewing Company (TAP) and SABMiller Plc (SBMRY). Currently, we have a long-term Neutral recommendation on Diageo, which carries a Zacks #3 Rank (short-term Hold rating).

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