Diageo Is a Luxury You Can Afford

Fresh on the heels of its purchase of super-premium tequila maker DeLeon three weeks ago, a venture it undertook with rap impresario Sean Combs, Diageo (NYSE: DEO  ) looks like it's set on cornering the luxury alcohol market. Last week, it launched an ultra-premium blended Canadian whiskey, Crown Royal XO, a blend of 50 different Crown Royal whiskies, and yesterday it announced it has bought another super-premium tequila, Peligroso, that's targeted toward the action sports and surfing culture of Southern California. Boy, talk about niche marketing.

Source: Peligroso Tequila.

The premium and super-premium spirits market is on a roll, expanding at a 10% rate in 2013, which far outpaced the 3% growth experienced by the overall spirits market. Like the spike in sales the brewing industry enjoyed from craft beer sales, premium spirits drinkers are seeking out better taste, greater quality, and finer craftsmanship. 

Peligroso comes in the usual silver, reposado, and anejo variants common to tequila, but also in a cinnamon-flavored offering that should benefit from heightened consumer interest in flavored spirits in other categories like vodka and whiskey. Brown-Forman saw double-digit growth in whiskey sales on the strength of product innovations like its  Tennessee Honey brand while Beam launched itself higher through flavored Pinnacle vodkas that continue to capture large swaths of sales. In fact, that was largely the reason Diageo countered with Smirnoff Whipped Cream and Fluffed Marshmallow flavors in late 2011 and launched its Sorbet line last year in striving to maintain its vodka market leadership position.

Those flavors, though, should give a hint as to what's really driving the market. Women are becoming a bigger force in spirits, branching out to sample more of the "browns" and "whites" of the liquor world that have traditionally been male-dominated. It's the same forces driving hard cider sales among brewers. Analysts at Rabobank find women comprise about 55% of the hard cider and teas niche.

Although we were supposedly promised Diageo was giving up on its acquisitive ways, the latest moves indicate there may have been a bigger hole left behind by the expiration of its distribution agreement with Casa Cuervo than we've been led to believe. While it was only a small portion of overall revenues, Diageo had been prepared to buy the brand from the family-owned business for as much as $3 billion.

It may be that it just sees the spirits segment as still having lots of room to run because tequila is continuing to rise to price points previously reserved for whiskey and cognac. The distiller, however, says the Peligroso acquisition is simply part of a larger strategy "of creating a collection of superb quality and distinctive tequilas at complementary price points to appeal to a wide range of consumers."

Apparently, most of those consumers are at the high end of the drinks market, even if Peligroso will be positioned below the superpremium DeLeon, which sold about 10,000 cases last year, and its ultra-premium counterpart Don Julio, which enjoyed a strong 2013, selling 230,000 cases, a 15% increase over the year-ago period.

Whatever else it does, buying Peligroso cements Diageo's leadership position in an expanding category, and that alone may be enough to cause investors to lift their glasses in tribute to the distiller's growth and bid up its shares further.

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