Investor doubts about Allied Domecq’s future and a fall in shareprice have once again overshadowed some impressive brand performances in its full year results. Chris Brook-Carter reports on where Allied is failing to convince.
Can a drinks company operating in the current economic environment impress all of the people all of the time? Probably not. But there must be a continuing sense of frustration at the Bristol headquarters of Allied Domecq that it has failed to impress more of the people more of the time with its current strategic direction.
Last week’s set of full-year figures were a solid proposition on face value. Allied added 3% in annual pre-tax profits, up from £480m to £495m, and raised turnover from £3.3billion to £3.4billion.
And yet by the end of the day, shares in Allied had fallen more than 4%.
Until recently, a large chunk of the scepticism surrounding Allied focussed on its continued intention to build a wine division alongside the more traditional spirits portfolio, a decision attacked for the highly volatile nature of this agricultural industry.
But CEO Philip Bowman and the company’s wine supremo David Scotland have done a good job over the last six months convincing doubters they can control the vagaries of the wine business – a line of arguing backed up by some solid numbers.
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By GlobalDataAllied’s wine division reported a 4% organic increase in turnover in spite of a 2% drop in underlying volumes – a decline blamed on efforts to focus away from the bottom end of the market, particularly in Spain at the Bodegas y Bebidas business.
“Our premium wine brands have performed strongly and are on track to deliver the targeted return on investment,” said Bowman. “Our strategy, based around geographical and varietal diversity, brand laddering and economies in procurement, has shielded us from the difficult year experienced by most other wine companies.”
Within the spirits division, the company’s strategy to focus on core brands also appears to be working. Though volumes in Ballantine’s and Beefeater fell 4% and 2% respectively, volumes overall in the group’s core spirit brands increased by 5% in the period, driven by Malibu, Sauza, Tia Maria and Maker’s Mark.
Indeed, Sauza saw volumes leap 28%, making it the world’s fastest-growing premium spirits brand. Meanwhile, the acquisition of Malibu has proven a shrewd one, particularly in the UK, where it has leapfrogged Archers to become the number-two speciality spirit.
Market by market, there were certainly concerns about the Eurozone, which Bowman said, “remains difficult”. But these are hardly problems unique to Allied, as Unilever’s recent results demonstrated. And the company will have been encouraged by the way a strong performance in the US, the world’s most important market, helped it ride out the tough conditions across the Atlantic.
So where have the doubts sprung from? An initial issue, one analyst told just-drinks, is that Allied made cuts in its marketing over the second half, a move which, when made by a consumer goods company, is almost always viewed critically by the city. And the feeling here, the analyst said, was that while it helped the bottom line, the financial boost did not contribute to “good quality results.”
But the real concerns run deeper. In particular they focus on the future rather than the most recent set of figures. Growth in the second half slowed considerably in turnover terms, analysts pointed out, with net organic turnover growth at 2% against 6% in the first half – less than Allied’s rivals Diageo and Pernod Ricard.
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“One feeling is that Allied is inconsistent with results,” said the analyst, whilst another pointed out that the turnover slowdown did not bode well for future growth. At a time when many feel things should be getting a bit better, Allied is failing to convince.
“The most attractive appeal of the stock appears to be a possible takeover target,” said the analyst at SG Securities last week. And here lies the real issue, the perennial question of whether Allied has to merge in order to remain competitive.
Though Bowman said last week that Allied was not in any talks at the moment, to a certain extent, he has brought the uncertainty that this constant questioning of Allied’s size generates, upon himself.
Size is clearly an issue said the analyst. “The sheer fact that Bowman talks continually about the need for partnerships [suggests] he has admitted as much,” he argued.
The usual suspects for any kind of merger or takeover remain the world’s number three and four wine and spirits groups Pernod Ricard and privately-owned Bacardi. But Brown-Forman is still also a possibility.
“If that [some kind of partnership] doesn’t happen in the next 12 months it’s possible to think of some sort of break up,” said the analyst. Though more complicated than the deal to split up Seagram some two years ago, it is still possible, the analyst continued.
“Early indications are that the 2004 financial year has started well and we are on track to meet current expectations,” Bowman said last week. The question, though, is whether those expectations are strong enough to convince investors and the company’s critics that Allied can continue competing in its current form.
