Diageo raises spirits with 6% rise in profit but growth rates decline

Posted by Daniel Palmer on 13th February 2009

Premium alcohol beverage giant, Diageo, has reported organic profit growth of 6% for the first half of 2008/09 despite facing stronger economic headwinds in the last two months of the year.
“Diageo’s performance in this first half again demonstrates the resilience we have from our brand range across categories, price points and geography,” Paul Walsh, Chief Executive of Diageo, said. “The global economic slowdown has affected business in the period and in November and December this impact was more pronounced. In this difficult market environment Diageo has delivered 3% organic net sales growth, 6% organic operating profit growth and 9% underlying eps growth and we have maintained our financial strength. We have delivered value in the half from the brands we have added, Ketel One, Rosenblum Cellars and Zacapa.”

Diageo, which owns the Guinness, Smirnoff, Johnnie Walker and Baileys brands, reported the ready-to-drink market in Australia was a key reason behind a fall in sales for the region – attributing the drop to the rise in tax on such products in April last year. The decline in performance of this division helped reduce volume growth by 4 percentage points and net sales growth by 6 percentage points in Australia, part of an overall decline in volumes in Asia Pacific. North America and International divisions (which includes Africa and South America) were the two regions were volume growth was achieved, while Europe and Asia Pacific both realised volume declines.

Of their most well-known brands in Australia, Smirnoff was the best performed – achieving global volume growth of 1 per cent and organic sales growth of 8%. Guinness (-1%), Baileys (-5%) and Johnnie Walker (-6%) all saw volumes fall worldwide, although Guinness (7%) and Johnnie Walker (5%) still managed to achieve organic sales growth.

The spirits leader reported they are implementing a restructuring programme “designed to ensure that Diageo emerges from this challenging time with improved routes to market, even stronger brand positions and enhanced financial strength.” The restructure will create full year savings of £100 million a year, largely accrued in fiscal 2010.

Mr Walsh remained confident about the final six months, but was cautious given the prevailing economic environment. “Current economic trends indicate that consumer confidence will reduce further and the outlook for the second half is more difficult to predict. However, across Diageo we have an experienced management team which combined with the consumer appeal of our brands, the effectiveness of our routes to market and our geographic diversity gives us confidence in our business,” he suggested. “In the second half we will be yet more agile in our response to changing consumer demand and we will continue to invest behind our business while achieving efficiencies across the regions particularly in marketing spend where we are seeing strong media rate deflation. Given these strengths, albeit with more uncertainty about the wider economic environment, we believe we can deliver organic operating profit growth for the full year in the range of 4% to 6%.”