Analysis - Premium drinks to remain under pressure - Diageo chief
Diageo posted its half-year results today
Diageo CEO Paul Walsh has said that he sees little respite for the firm's premium drinks brands in key western markets over the medium term, but added that the drinks giant does expect improved profits in its second half.
Diageo has adapted its portfolio to target consumers who have moved their consumption away from the on-trade and have become increasingly frugal with their money during the economic downturn.
The group today (11 February) reported a 2% fall in like-for-like sales in the first half of its fiscal year, to the end of December.
Sales of global priority brands, including Johnnie Walker, Smirnoff and Guinness, fell 4% in volume and 5% in value on a like-for-like basis. Lower priced drinks, however, grew value sales by 2% on flat volumes.
"We don't expect a fundamental shift in consumer demand in the next six months" Diageo CEO Walsh told just-drinks at the group's earnings conference in London today.
He conceded that the group has "lost opportunities" in the premium segment, due to the economic malaise.
Walsh added, however, that the group has worked hard to adapt by introducing smaller pack sizes of premium brands, such as with Smirnoff in the UK and Captain Morgan and Bushmills in Russia. It has also expanded its range of ready-to-serve cocktails, such as Smirnoff Mojito, in North America and Europe to target home drinkers.
"One thing we are very clear about is that consumer aspirations for our brands has continued," said Walsh, adding that disposable income is the main problem.
Drinks sales in Ireland and Spain, which have both suffered relatively badly in the global economic downturn, are not expected to show improvements for the next calendar year.
Walsh also said that Diageo expects western consumers to return to premium drinks and also to the on-trade in some markets, once economic conditions improve. Until then, he said that success in western markets remains a "share game".
Emergings markets continue to show promise and boosted the group in its second quarter.
Gilbert Ghostine, head of Diageo's recently formed Asia Pacific division, told just-drinks that the premium Scotch market in China - where Johnnie Walker has a leading position - is expected to grow 8% by value in Diageo's fiscal 2010.
Diageo plans to "modestly" increase marketing spend as a percentage of sales behind certain brands in the second half of 2010.
The firm expects a significant improvement in profitability in the second half, due partly to less one-off charges and margin improvements, as well as the realisation of GBP125m in cost savings for the fiscal year. As a result, it expects to reach like-for-like operating profits guidance of 1% to 3% growth for the year.
Separately, Walsh issued a warning to the UK Government on corporate tax rates, in answer to recent speculation that the company could move its headquarters out of the country.
"We like operating out of the UK," he said. "However, it's a competitive world and if we continue to see tax increases at the corporate level, and individual level, we will look at other options."
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