EUROPE: Diageo downbeat on Europe prospects

Diageo is preparing for another tough 12 months on Europe's alcoholic drinks market, with little sign of economic improvement in key countries, according to the group's president for the region.

Diageo expects to report only "modest" net sales growth in Europe for the second half of its current fiscal year, which runs to the end of June, Andrew Morgan told analysts yesterday (24 June). The Smirnoff and Guinness producer saw sales in the region fall by 5% in the first half of the year.

Things are unlikely to get better over the next fiscal year, with sales expected to be "either side of flat", said Morgan in a conference call.

His comments serve as a warning to the drinks sector, with Europe's economies struggling to recover and fresh concerns in southern Europe following Greece's fiscal crisis.

"I don't see any reason to forecast a lot of growth in the base of our business," said Morgan. "There's not really any strong economic recovery from Europe that we can see," he said, addding that the "economic outlook is not great for the next few years in Europe".

Addressing the situation in Greece directly, Morgan said that Diageo has pulled planned investment out of the country and expects significant destocking from wholesalers. Greece constitutes around 6% of Diageo's annual net sales in Europe.

"We could be looking at category sales down well into the mid-teen percentages (in Greece) for the next year," said Morgan. "In itself, this would not have a huge impact on our total performance, but if that starts to spread to Spain, Italy and Portugal then we're in a different position altogether."

Diageo has sought to mitigate the effects of Europe's economic slowdown by targeting at-home drinking and building stronger relationships with key retail customers, such as Tesco, Carrefour and Metro.

Morgan said that Diageo's sales via these channels were running significantly ahead of competitors.

"At-home drinking is something that we can own in a much bigger way," he said. 

The drinks giant has identified consumers over 50 years of age and women as two particular target groups in Europe over the next few years. Commenting on the group's plan to appeal to larger numbers of women. Morgan said: "How can we complain about tough economic conditions when 50% of the population is not properly served by our industry?"

"We are not prepared to accept that we can't grow our sales in Europe in the next few years," he added, noting that he believes premiumisation will return to the region over the "long-term".