Global beverage company Diageo (NYSE:DEO) gave a business update for fiscal 2021, announcing an improvement in its business since its last fourth-quarter earnings report. CEO Ivan Menezes said on the Sept. 28 release, "Our outlook for the first half of fiscal '21 has improved since the year-end, reflecting the good start to the year, particularly for our U.S. business."

Here's more detail about why the consumer discretionary company is optimistic.

A row of Diageo products

Image source: Diageo.

Diageo saw sequential improvement across all regions

Diageo is seeing a nice sequential improvement, boosted by a recovery in the on-trade segment and ongoing robust demand in the off-trade channel. The on-trade (or on-premise) market is comprised of hotels, restaurants, bars, and coffee shops, while off-trade (or off-premise) includes supermarkets, convenient stores, big box stores, liquor shops, and mini markets.

Europe's on-trade business is recovering as COVID-19 restrictions have eased in most areas, but there remains some risk of a new wave of coronavirus-related limitations for restaurants. On its recent business update (Sept. 28), Diageo cited robust performance in the U.S. market, helped by the reopening of restaurants, bars, and hospitality outlets in all states. On-trade in China is also continuing to recover.

During the fourth quarter (ended June 30) and the second half of fiscal year 2020, Diageo's results outside of the U.S. were challenged by COVID-19, as these regions have more "on-trade" exposure. About 50% of sales in Europe and much of sales in Africa come from on-trade. Diageo's beer sales were hurt as Europe and Africa account for most of the company's beer demand.

Off-premise trends are still strong

Off-premise consumption of alcohol continues to be strong, and momentum is likely to continue based on industry data from Nielsen. Spirits was the top-performing category, with a 33.5% increase for the COVID-19 period year to date versus the same period in 2019. Diageo holds two of the top five global spirits brands (Johnnie Walker and Smirnoff), based on total sales. Danelle Kosmal, vice president of beverage and alcohol at Nielsen, said:

Off-premise alcohol also has experienced steady and somewhat consistent trends since June. Alcohol grew 18% in off-premise channels for the latest week ending 8/22/20, and year-over-year dollar growth trends for the previous week were +18.5%. The idea of consumers settling into this next normal continues, and I expect to see similar off-premise growth trends for next several weeks. 

The better performance in the spirits category bodes well for Diageo, because this category comprises the majority of its revenue. Over 40% of its revenue comes from six global spirit brands, even though it holds over 200 spirit brands.

Diageo is seeing share gains in the U.S. 

Menezes stated on the recent business update that the U.S. segment was strong and better than prior projections, "reflecting resilient consumer demand and the spirits category continuing to gain share within the total beverage alcohol market." The U.S. market is the largest regional segment by net sales at 40% (fiscal year 2020). The company cited better retailer confidence in the off-trade channel. On-trade demand is more muted due to reopening restrictions like capacity restrictions.

Some particularly strong brands during the latest quarter were Casamigos, Don Julio, and Crown Royal, which are gaining market share in the U.S. Nielsen data for the week ending Aug. 22 showed that tequila was one of the top-performing categories, with an increase of 59.1%.

Overall, Diageo is a dominant player in the global spirits market, with premium brands and a large presence in the U.S. market. As global economies open up and consumers resume socializing at restaurants and bars, Diageo is well-positioned to see a lift in its revenue.

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