just On Call - Diageo "turning the corner" in Europe
Diageo reorganises in Europe
Diageo hopes to improve its sales performance in Europe this year by shifting more resources to fast-growth eastern markets and selling more super-premium spirits in western countries.
Consumer confidence remains fragile and Europe lacks the glamour associated with high growth rates in Asia, Africa and Latin America, but Diageo is hopeful of at least slowing a decline in European sales in its current fiscal year.
For the first quarter of Diageo's fiscal year, the drinks giant's organic net sales in Europe rose by 6% on the same three months of last year, when sales dropped by 3% on the same basis.
"We continue to face a tough economic environment," Diageo's president for Europe, Andrew Morgan, told investors on a conference call yesterday (27 October). "The Q1 growth rate is not our expected trajectory for the full-year," said Morgan. "However Q1 does show that we are turning the corner in many resepcts following our reorganisation in the summer."
While the fine details of that reorganisation are unclear, it has seen Diageo regroup its Western European business into a more cohesive unit, particularly in terms of marketing. Starting this year, the firm will separate Western and Eastern Europe in its full-year results, which is set to highlight the disparity in growth rates between the two regions.
"We believe that we now have absolutely the right organisation design in Europe," Morgan told investors. More sales resources will be ploughed into Russia, which has performed well for the group in calendar 2011. "Our Scotch [whisky] business in Russia is material, sustainable and fast growing," said Morgan.
In western markets, Diageo plans to put more muscle behind super-premium spirits, believing that there are enough consumers still seeking luxury drinks amid the economic gloom. Morgan said that the Smirnoff distiller will also pull back further from discount deals in multiple retailers. "We intend to remain compettive, but we are determined to stop the margin dilution," he said.
Despite the tough climates in Spain, Greece and Ireland, some Western European markets showed promise for Diageo in its last fiscal year. Sales in Germany rose by 13%, albeit off a relatively low base, while Benelux sales rose by 5% and J&B whisky sales grew strongly in France. In the UK, Diageo's net sales rose by 2% for the year.
Beyond organic sales, Diageo expects to see net sales in Europe boosted this year by Turkey's Mey Icki, which it acquired in August for US$2.1bn. Morgan told just-drinks at Diageo's full-year results conference that Mey Icki effectively doubles the group's emerging market exposure within Europe. With Turkey set to accompany Russia, he said that around a fifth of Diageo's annual sales in Europe are expected to come from what the firm still considers to be emerging economies.
For the year to the end of June 2011, Eastern Europe accounted for GBP275m (US$443m) of the company's EUR2.6bn sales in Europe and GBP84m of its GBP727m operating profits in the region.
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