Analysts have warned Diageo against selling its beer business

Analysts have warned Diageo against selling its beer business

Analysts didn’t come away from Diageo’s latest set of results with overwhelming praise for the company, but there are some signs of life for the drinks behemoth.

On 30 July, Diageo reported flat sales for its fiscal full-year, with volumes slipping back slightly. According to Bernstein analyst Trevor Stirling, yesterday’s numbers round off "two miserable years" for the firm.

In a note following the results, Stirling says: "Since mid-2013, consensus EPS estimates for fiscal-2016 have fallen by approximately a third, with likely another 4% fall after yesterday's results…. This time last year, we thought that fiscal-2014 was the nadir, and we were clearly badly wrong."

Meanwhile Euromonitor’s senior alcoholic drinks analyst Jeremy Cunnington offered an overview as to what caused Diageo’s "weak results", as he calls them. The latest numbers, he says, are the product of "a combination of historic failings and weak global conditions".

On the "historical failings" front, Cunnington believes the company placed "too much focus pre-2008 economic crisis on a few core markets in North America and Western Europe". The outcome, he says, means that "many of its core brands such as Smirnoff, Baileys and Captain Morgan have struggled for growth as the brands mature in these markets".

And, when it comes to "weak global conditions," Cunnington believes "there is little Diageo can do when core emerging markets such as Brazil and Russia are universally suffering".

He also points to "errors in judgement" such as "slowness in developing a high-end Bourbon", but he also admits that "spirits is a long game and judgement should not be rushed".

There has been much talk of late about the company’s ‘non-core’ businesses and recent news around beer in Africa has sparked a few to speculate over whether beer is now ‘non-core’ for Diageo. Cunnington warns against getting rid of beer, however. "Short-sighted solutions such as divesting its beer operations would only make the situation worse in the long-term by depriving Diageo of a major platform for long-term growth in Africa, which is potentially one of the most dynamic regions for spirits in the future," he finishes.

Looking forward, Bernstein’s Stirling cautiously agrees with Diageo's "medium- to long-term optimism".

And, green shoots are starting to show, according to a note from Nomura’s Ian Shackleton. "We continue to see a strong recovery story for the global spirits industry," he says. "There are clear signs now of Diageo starting to get its share of the action. Management appears confident of stronger momentum in the new year across all geographies, partly reflecting the turn in destocking, and partly reflecting improved underlying momentum in both North America and Europe."

And, as the company continues its cost-saving initiative and installs former CFO Deirdre Mahlan as its new lead in North America, there are likely to be a few more ups and downs on the road ahead.