Chris Mercer

Focus - Diageo adds to spirit of renewal

By Chris Mercer | 6 May 2010

Diageo lifts sector spirits

Diageo lifts sector spirits

A rebound in third quarter sales from Diageo has increased the sense of renewal in the global spirits sector following a dismal 2009.

Diageo's 12% rise in like-for-like sales in the three months to the end of March, as announced today (6 May), shows that firm has regained at least some of the ground lost in the same quarter of 2009, when destocking by distributors caused sales to slip by 7%.

Its trading update enables us to talk with more confidence about those fabled green shoots in the global spirits sector, following last week's announcement of a 16% rise in like-for-like sales for Diageo's arch-rival, Pernod Ricard, in the same period.

Pernod's heavier presence in Cognac and steeper fall at the beginning of calendar 2009 are the main reasons for its stronger showing in the most recent quarter - despite the French firm suffering more than Diageo in Champagne.

Analysts have praised Diageo for a solid fiscal third quarter, despite noting that several external factors boosted the group, including the timing of Easter and the Chinese New Year, as well as the stockpiling of key brands ahead of the duty tax rise on alcoholic drinks in the UK at the beginning of April. 

"With this double-digit sales result it appears that Diageo is well on its way to meeting its low single-digit organic guidance target for the year," said analysts at Credit Suisse in a note.

There is no doubt, however, that emerging markets such as those in Asia are fuelling the rebound in sales. Latin America, especially, boosted Diageo in the last quarter.

Ongoing "fragility" in mature western markets, as Diageo CEO Paul Walsh referred to today, remains a cause for concern.

Analysts at JP Morgan linked this to Diageo's unchanged operating profits guidance. "This, we think, reflects the minimal signs of recovery in many mature markets, the absence of price/mix across Diageo (we estimate organic price/mix was flat in Q310) and the need to reinvest back into brand marketing."

Several analysts highlighted concerns over the price/mix situation, essentially a barometer of whether consumers in mature markets like the US and UK are returning to premium drinks.

Diageo is confident that premiumisation will continue, as was made clear by the group's chief marketing officer in a recent interview with just-drinks.

However, the group remains cautious on how soon and how quickly this will take place. The drinks trade has yet to discover, then, how the global economic downturn might affect consumer buying habits over the longer term.

Sectors: Company results, Spirits, Wine

Companies: Diageo, Pernod, Ricard

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