Diageo growth hit as drinkers shun premium booze

Diageo revises its forecasts for the current year downwards, as sales remain stubbornly flat...

Last Updated: 06 Nov 2012

Diageo saw its shares slide this morning after a fairly lacklustre set of annual results: although operating profits inched up 4% to £2.6bn for the year to June, the drinks giant admitted that underlying sales were basically flat – and pre-tax profits were actually down slightly, thanks partly to restructuring costs. It's also had to revise its forecasts for the current financial year down again. Today’s numbers show that some of its biggest premium brands (i.e. money spinners) have seen sales plummet, presumably because cash-strapped punters are staying at home and opting for Tesco own-label stuff instead…

Diageo boss Paul Walsh admitted it had been a ‘very challenging year’ for his company, with revenues flat across the board – in Europe net sales were down 5%, with the UK one of the only markets to see any growth (we’re determined boozers, us Brits – apparently we can’t get enough of Blossom Hill wine). And some of its biggest brands really struggled – Johnnie Walker whisky was down 11% worldwide, J&B dropped 13%, and Tanqueray and Bailey’s both slipped 10%. This has forced Diageo into a cost-cutting drive: it slashed marketing budgets by 9%, and plans to save a further £120m this year.

Worse still for investors, Walsh also thinks there is ‘still uncertainty as to the sustainability and pace of any recovery’. After revising his growth forecast for the current year down from 7-9% to 4-6% in February, he’s now talking about ‘low single digit organic operating profit growth’ – which is basically corporate-speak for ‘pretty much flat’. So it’s perhaps no wonder people have been selling his shares today.

Diageo insists that its model is still perfectly valid: Walsh reckons the premium drinks category continues to grow faster than the value drinks category, and we can well believe that people who traded down to cheaper rocket fuel when cash was tight are likely to go back to their favourite brands when things pick up. But cutting marketing spend won’t help the drinks giant persuade punters that its brands are worth paying extra for. Walsh clearly recognises this, which is why he’s planning to invest some of the money he saves this year on increased marketing activity for all his big brands.

Nonetheless, it looks like being a tricky year for Diageo (Britain’s Most Admired Company, lest we forget). Apart from anything else, this cost-cutting drive includes the closure of a Johnnie Walker factory in Kilmarnock, which has provoked a storm of protest – campaigners are heading to Downing Street today to try and get Gordon Brown to intervene on their behalf. Walsh may need a drink himself by the time it’s over...

In today's bulletin:

FSA chairman mulls new tax to cut City down to size
Diageo growth hit as drinkers shun premium booze
Editor's blog: Socially useful banks, and Big Brother
Lego declines to Tap new market
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