UK: Comment - Diageo: hitting the bottle and cutting out food
Diageo has issued a trading update. Its core brands are still doing extremely well, particularly in the pre-mixed drinks category. Its disposals of non-core operations are also looking good. The drinks company looks set to do well over the next year despite the threat of recession, particularly if the Burger King spin-off and the Captain Morgan acquisition go according to plan.
Diageo, spirits giant and Burger King owner, has started the financial year well, according to CEO Paul Walsh. However, there has been a slowdown in non-core brands and certain parts of the company's North US operations. The effects of the terrorist attacks have apparently been restricted to the US, primarily in trade business accounts, military bases and travel related accounts, but the company has begun a review of its cost base in case the negative effects turn out to be long-term.
Diageo's larger portfolio and strength is helping it move forward in troubled times and it looks remarkably healthy. It has been busy re-organising the business around its premium drinks brands and the move is already paying off. It has its finger in many fast growing markets, including the UK pre-mixed drinks category, where Diageo is seeing particularly good sales thanks to Smirnoff Ice and the recently launched Archer's Aqua range.
The divestiture program is going well too. The Pillsbury sale was finally approved last week, representing nearly all of Diageo's food production interests. And even the lackluster Burger King chain is starting to show an improvement. When the Q4 results were released in September, sales and profits were continuing to fall, but since the attacks many Americans have lost the inclination to eat healthily. Burger King sales were up 3% in September and while this may be merely a short-lived change of pace, Diageo only needs the trend to continue until it can float the business.
A major question hanging over Diageo at the moment is the outcome of the legal and antitrust issues surrounding the Seagram acquisition - most importantly, whether it will win the court battle with Allied Domecq over Captain Morgan. The general consensus is that Diageo will keep control of the rum brand, but a decision may take some time.
But overall, barring unpleasant surprises over Burger King or Captain Morgan, Diageo seems set for a strong performance.
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