{"id":24706,"date":"2011-10-25T08:00:45","date_gmt":"2011-10-25T12:00:45","guid":{"rendered":"http:\/\/countingpips.com\/fx\/2011\/10\/25\/diageo-into-the-wilds-of-africa\/"},"modified":"2011-10-25T08:00:45","modified_gmt":"2011-10-25T12:00:45","slug":"diageo-into-the-wilds-of-africa","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/fx\/2011\/10\/25\/diageo-into-the-wilds-of-africa\/","title":{"rendered":"Diageo: Into the Wilds of Africa"},"content":{"rendered":"

By The Sizemore Letter<\/a><\/p>\n

There is something about the words \u201cScotch whisky\u201d and \u201cAfrica\u201d that conjures the mental image of Sir Henry Morton Stanley and Dr. David Livingstone\u2019s 1871 meeting in the wilds of Tanzania.\u00a0 Stanley was a reporter who went to Africa in search of the missing missionary and who upon finding him greeted him with the now famous \u201cDr. Livingstone, I presume?\u201d<\/em><\/p>\n

\"\"<\/a><\/p>\n

I know it\u2019s absurd, but I\u2019ve always pictured Livingston inviting Stanley into his grass hut, tastefully decorated with Victorian furniture, and offering him a tumbler of Johnny Walker Blue Label.\u00a0 For two gentlemen far away from home, anything less would be uncivilized.<\/p>\n

That didn\u2019t happen (or it wasn\u2019t recorded, at any rate), but it\u2019s highly likely that a meeting today between two persons of note in Africa would<\/em> involve a Diageo (NYSE: $<\/span>DEO<\/a>)<\/strong> product.\u00a0\u00a0 According to The Economist<\/em> , \u201cAs Africans grow richer, they drink more Scotch.\u201d<\/strong> (See \u201cKeep on Walking<\/a>\u201d)<\/p>\n

Sales of Scotch whiskey rose to $147 million of it in the first six months of 2011, an increase of 34% over last year, and Diageo\u2019s Johnnie Walker is responsible for much of this.\u00a0 Johnny Walker sales doubled in east Africa last year and are on track to do even better in 2011.<\/p>\n

There is every reason to believe that this level of growth is sustainable.<\/strong>\u00a0 Again, returning to The Economist<\/em>, \u201cEach Nigerian sips only a third of a shot each year, on average. A typical Frenchman downs 40, even though it goes badly with wine.\u201d<\/p>\n

Given the lower average incomes south of the Saharan sands, we can\u2019t expect Africans to drink Scotch at European levels any time soon.\u00a0 But I do<\/em> expect Diageo to enjoy high growth in the region for the foreseeable future.\u00a0 African, like East Asians, Arabs, and Latin Americans, are status conscious and live in a hierarchical society.\u00a0 As The Economist<\/em> explains,\u00a0 \u201cIn Africa, with its patronage culture, whiskies with distinctive labels should do well.\u00a0 Johnnie Walker\u2019s labels make it abundantly clear how much a customer has spent. Red Label is the cheapest. Black is pricier, followed by Green, Gold and Blue. Beyond Blue is King George V, which sells for more than $500 a bottle.\u201d<\/p>\n

And it\u2019s not just for gents at the country club.\u00a0 \u201cCriminals in South Africa buy it to prove they are successful criminals.\u201d<\/p>\n

I continue to recommend Diageo as a long-term holding.\u00a0 The company sits at the intersection of several powerful macro themes, any one of which would be attractive in its own right:<\/p>\n