How Does Diageo plc (ADR) (DEO) Innovate?

A shot of science, please

The webcast also featured Luca Lupini, the head of the Technical Innovation team at Diageo. He discussed some of the science that put Diageo ahead of its competitors. One of these is evident in the gin Tanqueray 10. This gin was made from fresh ingredients and distilled in small batches. Most gin is made using dried ingredients, but the extra flavor imparted using this method allowed Tanqueray 10 to win three double gold medals in a row at the San Francisco World Spirits Competition, and it is the only gin in their Hall of Fame. Diageo has also been able to create beer from ingredients other than barley and hops, using cassava as the main ingredient in Ruut Extra. This beer was a technical innovation that Diageo plc (ADR) (NYSE:DEO) jumped all over, getting the product to market in just eight weeks.

Does innovation matter?

The question, then, is simple: after all this, is Diageo’s innovation engine running at full steam? Are they effective at creating new products and making money from those new products? The numbers say yes. In the last five years, Diageo has created new products with revenue of over $2 billion. In a slow moving market like spirits, this is a phenomenal accomplishment considering that amount is almost the same as rival Beam‘s entire 2012 fiscal year revenue, but is only about 1/9^th of Diageo’s revenue. Better yet, Diageo doesn’t miss with their innovations much: 73% of their new products are still in the market five years after launch, as compared to the category average of 32%.

Should Diageo plc (ADR) (NYSE:DEO) be in your portfolio? Let’s look at a couple quick metrics (data from finviz.com) (INDUSTRY is Beverages – Wineries and Distilleries)

According to the table above, Diageo is valued about the same as its peers.The only outlier here is the return on equity for Diageo, which is substantially higher than the rest of the industry due to its large amount of debt, none of which is likely to be a problem. All of this adds up to an industry’s eight hundred pound gorilla that is growing organically, doesn’t waste money, and seems to be fairly valued.

Timothy Noffsinger owns shares of Diageo plc (NYSE:DEO) (ADR). The Motley Fool recommends Beam and Diageo plc (ADR) (NYSE:DEO).

The article How Does Diageo Innovate? originally appeared on Fool.com.

Timothy is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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