Comment - Diageo forced into Ireland rethink
Ireland's dilapidated economy looks to have forced Diageo to shelve plans for a full-scale overhaul of brewing operations for at least 12 months.
Diageo confirmed to just-drinks last night (1 February) that it has suspended its brewery restructuring plan indefinitely in Ireland.
With Ireland's economy, and drinks industry, reeling from the worst recession to hit any country in Western Europe, it appears that the global drinks giant is hedging its bets until it has a clearer picture of consumer demand.
A deterioration of Ireland's on-trade during recession and a crash in property prices have made Diageo plans unattractive.
The group originally intended to sell off land occupied by its Kilkenny and Dundalk breweries for around EUR500m (US$695.5m), and use the proceeds to help build a EUR650m state-of-the-art brewery outside of Dublin.
The St James's Gate and Waterford breweries were to remain open, but would be streamlined - particularly Waterford.
However, as Ireland's economy sank, it became clear that property and land values were unsustainable.
"2009 marked a low point for the commercial property market in Ireland," says a report released today (2 February) by international estate agents' CB Richard Ellis.
It adds: "With sentiment and domestic economic conditions weak and bank funding remaining severely restricted, it will likely be 2011 before conditions in the Irish property market improve significantly."
Coupled with this, Diageo and other drinks firms have faced falling demand for drinks. The company singled out Ireland and Spain as its worst performers in the fiscal year to the end of June 2009.
Sales of Guinness are struggling to maintain volume momentum in both Ireland and neighbouring UK. Meanwhile, growth for the brand is coming largely from Africa and parts of Asia. Diageo produces a significant amount of Guinness for these markets under licence at breweries nearer to where the brand will be distributed.
While Guinness net sales rose 18% globally in Diageo's last financial year, brewing capacity is not being tested by such stern volume sales rises. Like-for-like volume sales falls of 6% in Europe and 11% North America tapered increases of 2% and 5% in International and Asia-Pacific markets during the year.
It is little surprise, then, that the group is holding fire on its plans for Ireland.
Except, that is, for reducing staff numbers at St James's Gate in Dublin. Nearly a third of the current workforce is set to go, the group confirmed last night.
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