• Group will push further into African beer market
  • Confident on acquiring control of China's ShuiJingFang
  • Sales in Europe, US to remain subdued
Diageo upbeat on market challenges ahead

Diageo upbeat on market challenges ahead

Diageo plans to push further into Africa's beer market and invest more in emerging markets in Asia and Latin America as consumer demand for alcoholic drinks in Europe and North America continues to falter. 

Consumers across Europe are unlikely to spend more on drinks over the next 12 months, while there have been only limited signs of recovery in the US, Diageo's management said today (26 August). "We expect sales in Europe to be broadly flat for the year," group CEO Paul Walsh told just-drinks at the Smirnoff owner's full-year results conference.

Diageo today reported a 2% rise in like-for-like sales for the 12 months to the end of June, to GBP9.78bn (US$15bn). However, sales in Europe and North America fell by 2% and 3% respectively on the previous year - despite signs of resurgence in the second-half. 

The firm's international division drove growth, with particular gains for local African lagers and for the Johnnie Walker Scotch whisky brand in Latin America. Asia and travel retail also reported gains for the year and Diageo is keen to build on its presence in all of these regions.

Stuart Fletcher, president of Diageo's international division, told just-drinks that the drinks giant has ramped up its spending on African beer operations. Plans for the year ahead include a possible production base in southern Sudan, increased capacity in Nigeria and support for existing investment plans at Serengeti Breweries in Tanzania.

Lager brands such as Tusker in Kenya and Harp in Nigeria drove Diageo to a 5% rise in global beer sales for the year, despite a flat performance from Guinness. The Irish stout suffered in Africa as consumers traded down to lagers, which generally offer more volume at lower prices.

Diageo and Heineken's subsidiary in South Africa, Brandhouse, reported drinks sales up by 1% in both volume and value. Fletcher said that the business has taken share off beer market leader SABMiller since opening a brewery near Johannesburg earlier this year.

Turning to Asia, Diageo's Walsh said that he was "very confident" that the group will secure regulatory clearance to acquire a controlling interest in local spirits maker ShuiJingFang. He did not, however, offer a timeline on this. 

Emerging markets account for around one third of Diageo's annual sales and Asia, alongside Africa and Latin America, is key to the firm's efforts to increase this. Walsh said that the firm would look to grow both organically and via acquisitions in the region.

Gilbert Ghostine, Diageo's president of Asia Pacific, told just-drinks that China's thirst for super-premium Scotch whisky has continued apace. The John Walker, which retails for US$4,000 per bottle, has sold well during the year. "Sales were particularly good at Chinese New year," said Ghostine. The firm was forced to airlift in extra bottles into the country in the previous year due to strong demand.

Back in Europe and North America, Diageo and its rivals are locked in a battle for market share rather than outright sales growth. The firm praised market share gains for Guinness in the UK, which now accounts for 8% of on-trade beer volume sales - its highest level to date.

There is, however, continued uncertainty about southern Europe and, in particular, Greece and Spain. Diageo was forced to report a GBP35m impairment charge on its Ursus brand in the full-year due to the economic climate in Greece. Overall sales in the UK and Scotch whisky sales in Russia have gone some way to cushion the blow from elsewhere in Europe.

In the US, Walsh said that the firm had seen "some signs" of consumers returning to higher-priced brands, although the overall picture remained mixed. The group has spent the past year building closer ties with off-trade retailers across both Europe and North America in order to push out rivals.

Walsh said that Diageo was confident of a further increase in like-for-like operating profits over the next 12 months and that the year-on-year dividend to shareholders was set to rise by at least the same as this year - 6%.