Subscriber login Close [x]
remember me
You are not logged in.

Diageo in rude health

Published:  23 July, 2008

For a couple of years at least, momentum among the world's global drinks companies appeared to be with Pernod Ricard and, to a lesser extent, Constellation. Was the biggest of them all, Diageo, running out of steam because growth via takeover was virtually impossible? The answer is an emphatic no, judging by Diageo's half-year results to 31 December.

Pre-tax profits before exceptional items were only marginally ahead, but organic sales growth was 5% ahead and stronger than analysts had predicted; turnover increased by more than 8% to 5.36bn. That, combined with the effect of share buybacks, meant that earnings per share rose by 25%.

There were setbacks for Guinness in Britain and Ireland, as well as in the difficult European market for the group's spirits brands, but the sales breakdown showed Diageo had targeted its increased marketing spend with deadly accuracy.

Paul Walsh, the chief executive, caused some anxiety when he said in 2005 that, rather than expand in wine, he was making a priority of the US spirits market, where demographic influences were working in his favour. That tactic has been vindicated by the fact that Diageo has increased its share of the US spirits market by 0.4 percentage points, to 28%, and has four of its brands in the top 10 (Smirnoff vodka, Captain Morgan rum, Jos Cuervo Tequila and Crown Royal whisky). US spirits volumes grew by 4%, and sales volumes of wines rose by 6%.

The so-called Bric bloc of Brazil, Russia, India and China also proved lucrative as consumers traded up to imported brands. These countries now account for 4% of Diageo's sales.

Problems continue with ready-to-drink lines such as Smirnoff Ice (sales were down 24% in Europe), but while the company admits the category is in decline, the brands remain very cash-generative.

What pleased the market was that Diageo sees no reason to lower its forecast organic operating profit growth of about 7%. What that said to the market is that Walsh has got his tactics right and is winning.