Diageo faces up to European challenge
Diageohome.jpg" align="right" vspace="5">While enjoying a good year in the US, the London-based global drinks giant, Diageo, is experiencing tougher times closer to home in the UK and Europe. Olly Wehring reports on the company's recent year-end results, the good news coming from the US and the challenges it faces in Europe.
One advantage of being a geographically diversified company is that one region can compensate when another is feeling the pinch. Among drinks companies none is more globally spread - or as big for that matter - as Diageo, and the London-based giant's year-end results reflect differing fortunes across regions, more specifically on different sides of the Atlantic.
The maker of Guinness and the largest spirits group in the world said last week that income excluding exceptional items fell by 1.6% to £1.46 billion from £1.48 billion a year earlier. Earnings per share rose by 1% to 48.2 pence from 47.7 pence as Diageo's buybacks reduced the number of shares outstanding. These results were in line with the company's and analysts' expectations.
Total sales for the year dropped by 4.2% to £8.89 billion from £9.28 billion a year earlier, largely due to the Burger King disposal. Excluding the restaurants, however, sales of Diageo's core drinks business rose by 6% for the year.
Speaking at the release of the figures, Diageo's CEO, Paul Walsh, said: "Diageo has again demonstrated with these results that its outstanding collection of brands and its geographic diversity is delivering improvement in the important measures of trading and financial performance."
Walsh was quick to highlight the company's success in North America during the year, where sales from continuing operations rose by 10%, fuelled by a strong spirits market in the US. Diageo currently holds a 24% share of the spirits market in the US, but the concern is that while its volumes were up by 3% the market as a whole is thought to be rising by 3.5% to 4%.
During the past year, the company has also faced disruption because of a reorganisation of its distribution system in the US, a move intended to drive sales growth and profit margins. The company said that the revamp helped raise North American profit margins last year and, with the shake-up 80% completed, Diageo expects it to start paying off in the critical holiday season.
So while the other side of the pond held its own last year, and looks set fair for the coming months, Diageo is facing stern challenges closer to home. It is in the UK, Ireland and Europe that the good fight must be fought. Diageo has introduced price rises on Guinness, Smirnoff and Baileys in Britain and Ireland in the hope of stemming declining revenues on its doorstep. Although the price rises have stuck, in Ireland, for example, the smoking ban introduced in pubs in March has further exacerbated the issue. At a time when other drinks companies agreed to freeze price rises, Diageo ploughed on. Walsh seems unperturbed by the discord emanating from Dublin's on-trade. "(When it comes to price rises) the biggest players always go first and lose a little market share, but then the others always follow," Walsh told just-drinks.
In the 12 months to 30 June, Guinness sales volumes in Ireland fell by 6%, while Smirnoff and Baileys dropped by 4% and 12% respectively. As the trend away from bars and pubs accelerates in Ireland, the future for Guinness looks uncertain. "Guinness is very much an on-premise product," Walsh said. "If you are a Guinness adorer (in the pub), you do not automatically trade into Guinness in a can." Interestingly, Walsh would not rule out selling the iconic drink in the future. In an interview in Management Today last week, when asked if he would ever sell Guinness, Walsh replied: "It depends what the price was. At the end of the day we run our business for shareholders and if someone came in with something phenomenal we would have to look at it, look at the provenance aspect and the broader effects on our business. I cannot sit here and say "not at any price", but it would have to be far more than the multiples offered at the moment."
In the UK, a similar migration away from pubs and bars saw Guinness volumes drop by 3%, although Baileys and Smirnoff rose 5% and 11% respectively. The strong Smirnoff sales were offset, however, by a 17% drop in revenues from Smirnoff Ice, as overall Diageo revenues were down by 1% in the UK despite a 6% rise in volumes. The group can now boast the UK's biggest-selling wines with its Blossom Hill Californian brands. The range generates 8% of the group's UK revenues.
The fall in revenue from Smirnoff Ice in the UK is a precursor for the rest of Europe, where the authorities have grabbed RTDs by the throat, fearing the category is responsible for underage and binge drinking. In France, Germany Switzerland and Norway legislators have hit the category hard with taxation.
At the same time, the continent presents further problems for Diageo. Europe's population is ageing, economic growth is slowing, Walsh pointing the fact that real European GDP growth is below the world average, and a whole generation is moving away from the bar. "In certain instances, they are simply stopping the level of consumption," Walsh says. "Three years ago, the 21- to 25-year-olds were spending heavily on the big night out. Now they are often putting their money into electronic stuff such as iPods, computer games and DVDs."
"I think Europe is challenging for all consumer goods companies at the moment...and is likely to remain so for the foreseeable future," Walsh concludes. "Europe remains our key business challenge and North America continues to provide our biggest opportunities." Being big virtually everywhere in the world clearly does not do the group any harm but this is a balancing act that should keep Walsh's hands full.
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