Blog: Olly WehringDiageo - huge, but still growing

Olly Wehring | 4 July 2006

Resilience, reliability, durability - not characteristics guaranteed to set the heart racing, are they? But these were exactly the credentials on display at Diageo last week as the UK drinks giant issued a buoyant trading update ahead of its full-year results next month.

Some analysts, however, were unconvinced. They were disappointed that, after hefty marketing investment, Diageo would only say that growth in operating profit was in line with its previous forecast. However, earnings growth of 7% and sales growth of 6% are figures not to be sniffed at for a consumer goods juggernaut like Diageo.

Premium spirits sales in North America and growth from emerging markets, particularly in Latin America, have been behind the strong performance. The company also seems to have breathed new life into key brands, notably Guinness, which has seen sales in the UK rise on the back of a popular campaign that showed man’s evolution leading to a pint of the black stuff.

Sure, Diageo still has work to do. It needs to up its presence in other emerging markets particularly in India and China, where global rival Pernod Ricard was faster to recognise the potential of the market and has carved a very strong position in the premium spirits category. Diageo has also warned that European markets remain “subdued” but CEO Paul Walsh said the company would continue to invest more in marketing in an attempt to drive sales.

In the US, where the thirst for premium spirits shows no sign of abating, the drinks giant holds a strong position. Add to this a growing focus on emerging markets and a willingness to flex its marketing muscle to revitalise sales in a stagnant Europe, and Diageo seems set to post similar numbers in the months and, maybe, years ahead.

What’s more, Diageo is less exposed than some of its rivals to the grape glut in Australia and the resultant debilitating effects of price wars in major wine markets. Excess wine and falling prices weighed on profits at Constellation Brands last week, while Foster’s also announced that it was set to offload three wineries as it looks to trim back its business post-Southcorp.


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