COMMENT: Diageo - ice freeze ends the FAB days
UK spirits giant Diageo has announced a pretax loss of GBP208 million ($333 million) for the first half of the year. The loss was down to a GBP1.4 billion write-off from the sale of loss-making fast food chain Burger King - but the quarter also saw slowing growth in the core premium alcoholic drinks business.
Since it was formed in 1997, Diageo has been shedding non-core products and building up a few 'global priority' brands such as Smirnoff, Johnnie Walker and Captain Morgan. The strategy, which mirrors the plans of other major global FMCG companies ranging from Heinz to Unilever, is sound. However, it's not quite as recession-proof as investors once believed.
Much of Diageo's exceptional revenue growth for the last two years was attributable to one product in one market: Smirnoff Ice in the US. Datamonitor estimates that the 'malternative' drink went from sales of zero in 2000 to take over 50% of the US flavored alcoholic beverages (FAB) market in 2001 - generating retail revenues of over a billion dollars.
However, Smirnoff Ice US sales volumes fell 8% in the second half of 2002 compared to H2 2001. Not unrelatedly, the company's net alcohol sales values rose by just 4%, compared to its target of 8-10%. A year ago, the growth figure was 11%.
The Smirnoff Ice tail-off is the clearest sign yet that the US FABs boom is truly over. Datamonitor now expects the 'malternatives' category to grow at 3.3% a year in value terms to 2007, compared with growth of almost 10% a year from 1997-2002. Worse still for brewers, the unit price is set to fall significantly due to cutthroat competition within the market.
Diageo is rightly refocusing on what it does best: selling spirits. The 8-10% growth target isn't sustainable in the medium term, but 4% growth despite the Ice tail-off is far from disastrous. Diageo's 2003 results should be happier reading than the current set - if not quite as FAB as 2001's figures.
Related research: Datamonitor, "Beer, Cider and FABs in the US to 2007" (DMCM0402 - published March 2003)
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