Crisis, what crisis?
At a time when many consumers are tightening their belts, Diageo believes that the demand for "affordable luxuries" remained. “People are not necessarily drinking more, but are wanting to drink better,” Paul Walsh CEO of the world’s largest drinks group said.
Still, Diageo issued a warning that slowing economies around the globe - particularly in Britain, Ireland and Spain - would drag down its operating profits until next summer.
On 28 August 2008 the maker of Smirnoff vodka, Johnnie Walker scotch and Guinness stout announced an underlying operating profit growth of 7 percent to 9 percent for the year to June 2009.
The target was set when Diageo reported operating profit for the financial year to 30 June 2008 of GBP 2.3 billion (EUR 2.8 billion). Sales, after local alcohol duties, rose 7 percent to GBP 8.1 billion (EUR 9.9 billion).
Chief Executive Paul Walsh identified Britain, Ireland and Spain as being the most challenging for Diageo. Despite the woes of the U.S. economy, Mr Walsh insisted North America - Diageo’s largest market, accounting for about a third of sales - remained "robust" and not as challenging as western Europe.
In Britain and Ireland Diageo faces a tough market for its Guinness brand. Beer sales volumes have been falling at alarming rates. Fortunately, Diageo managed to raise prices which allowed Mr Walsh to call flat volumes and a 2 percent rise in the value of Guinness sales for the year to June “a strong performance”.
It was also reported that sales of the stout benefited from a 20 percent increase in marketing spend.
Mr Walsh suggested that Britain was fast heading for a drinks industry where 60 percent of alcohol sales came through supermarkets and off-licences. Pubs and bars currently account for about half of sales volumes but are losing ground fast. Mr Walsh said the trend towards drinking at home was being echoed through most mature drinks markets around the world.
So far shares in Diageo have managed to resist the downward pull affecting brewers. Many brewers have seen their share price drop between 20 percent and 30 percent over the past year. Not so Diageo. The company is regarded by many investors as a strong defensive stock, and has weathered previous global economic slumps comparatively well.
However, given that Diageo makes 55 percent of its operating profit in the so-called “problem housing market economies” of the U.S., UK, Spain and Ireland, the share’s inbuilt defence could be put to the test during the year to June 2009.
