Diageo Australia Faces Taxing Times

The complex, multi-tiered, and costly tax system hanging on to the Australian spirits industry continues to negatively affect Diageo ( DEO ). The sales revenue for the Australian arm of the company, for fiscal 2015 (ended June), crept ahead 1% to $373 million, while the market share also rose marginally to 32.5%. However, it has reported successive declines in annual profits over the last three fiscals. The net profit of $18.2 million in FY2015 dropped by 4.1% from the previous year. As stated by a spokesperson for Diageo Australia, the punitive tax on pre-mix drinks continues to impact the category.

See Our Complete Analysis For Diageo Here

The Complicated Alcohol Taxation System

Treasurer Joe Hockey released a tax paper earlier in the year, which brought forth a proposal to amend the current tax on alcohol. It highlighted the 16 different excise categories that exist in Australia and two different taxation systems, depending on alcohol type, concentration, commercial use, and container size. The differences in taxes vary between 3.6 U.S. cents of tax on a standard drink for cask wine, to more than 71 U.S. cents for spirits and ready-to-drinks (RTDs).

The excise charged is based on alcohol content, while winemakers are liable to pay a wine equalization tax (WET), a 29% tax on the wholesale price, before GST. However, various rebates, designed to help small producers, can help wineries get a refund of up to AUD 500,000 a year, and independent breweries can fetch AUD 30,000. At the top of the heap of alcohol taxes paid are distilled spirits and RTDs, due to former Prime Minister Kevin Rudd's decision to increase taxes on RTDs, or 'alcopops,' by 70%, to crack down on binge drinking among teenagers.

Tim Salt, former managing director of Diageo Australia, considered the alcohol taxation system to be unfair on spirit drinkers, and to disproportionately favor cheaper wine drinkers. He believed the long-term aim was to be a system where products are taxed based on their alcohol content. Currently, a ginger beer with 4.5% alcohol is taxed at the alcopop tax of AUD 1.01 (73 U.S. cents) per drink. But a ginger beer with more than 8% alcohol content could be taxed at 30 U.S. cents, since it is treated as a 'fruit or vegetable wine.'

A Number Of Other Challenges Lie Ahead

Alcohol consumption is on the wane in the country. On a per capita basis, 9.7 liters of pure alcohol was available for consumption in 2013-2014, 1.7% lower than the amount in 2012-2013.

Another challenge facing the company is the move to craft, whereby several smaller distilleries are opening around Australia to produce spirits such as gin and whisky, to compete directly with its marquee brands like Tanqueray gin and Johnnie Walker whisky. However, according to David Smith, chief executive of Diageo, craft is a massive opportunity for Diageo. Distill Ventures, a part of Diageo, has been making investments in early-stage whisky brands to help them grow and to innovate the whisky production process. This has been in direct response to consumers' growing interest in micro-distillers and craft spirits. The shift to craft represents changing tastes within the drinking culture, with people preferring to drink at home and drink better quality beverages. The inclination of drinking better will help bolster the prestige brands of Diageo, particularly with Christmas around the corner.

Focus On Home Entertaining To Be The Way Forward

Going forward, in 2016, Diageo will look to concentrate on its premium core brands such as Bundaberg Rum, Smirnoff, Johnnie Walker, and Captain Morgan in Australia. Other brands that performed well in 2015 were Talisker, which grew 45% over the previous year, and Tanqueray Ten, which had a year-on-year increase of over 40%. Captain Morgan also was up by 50% in value terms and became the second largest rum brand, overtaking Bacardi.

A number of marketing campaigns were launched in the year to inform consumers about making simple and delicious mixed drinks while entertaining at home. This included a promotion called 'This Calls for a Cocktail' with Schweppes and 'The Welcome Drink' with celebrity TV cook and personality Matt Preston from MasterChef. Diageo considers this to be a prosperous target segment as three quarters of the population drinks at home or in low tempo occasions.

Diageo also disclosed that in 2014-2015, it invested close to $1 million in responsible drinking programs. This comprised of government and industry engagement on alcohol policy and regulatory issues, as well as programs to promote responsible drinking in the community.

See Our Complete Analysis For Diageo Here

View Interactive Institutional Research (Powered by Trefis):

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap | More Trefis Research

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

More Related Articles

Sign up for Smart Investing to get the latest news, strategies and tips to help you invest smarter.