Flat sales as Diageo eyes India

27 August 2009

LONDON: Drinks giant Diageo, whose iconic brands include Guinness, has reported a 7% rise in profits for the year, but has cut its growth targets for the next 12 months in the light of "challenging market conditions". It has also announced plans to target growth in India, but without the help of local operator United Spirits, following the collapse of talks.

Diageo's net annual sales in Britain were up by 2% following gains in both the on and off-trade, but the fortunes of individual brands were varied. 

Underlying sales at the world's largest spirits group remained largely flat at £9.3 billion ($15b; €10.5b) for the year to the end of June, but operating profits reached £1.62 billion, representing 4% organic growth, the company said.
Bell's and Baileys both performed strongly following a “robust” Christmas, but Smirnoff vodka net sales fell by 3% as the brand came under pressure from competitors.

“This has been a very challenging year,” said chief executive Paul Walsh. “Overall however, our results demonstrate the resilience of our business. Our brand range and our geographic reach enabled us to deliver 4% organic operating profit growth and 10% earnings growth."

He added: “‘We took action quickly to manage these difficult times, reducing our cost base and re-focusing marketing spend as consumer trends changed. In fiscal 2010 we will benefit from cost reductions of £120 million as a result of our global restructuring initiative.”

Growth has been marked in the vodka, rum, tequila and beer markets overall, which together account for over 50% of sales, while gin and wine categories have been weaker. The firm's North American and Asia Pacific operations have been stronger than Europe.

Reflecting the potential it sees in emerging markets, Diageo recently announced that is looking to expand its Indian presence, but without the help of India's United Spirits.

Dialogue between the two companies ended after protracted negotiations about Diageo acquiring a stake of up to 15 per cent in the nation's biggest spirits group.

Analysts have estimated such a stake to be worth about $450 million, (£277m; €315m) but United Spirits is believed to have demanded up to $600m for the minority stake.

Undeterred, Diageo said it still believed that India, which accounts for less than 1% cent of the UK firm's total profits at present, was a market with “lots of potential”.

It argues that with a total population of 1.1bn, a  fast-expanding middle class, and a legendary "fondness” for Scotch whisky, India will pay dividends in the future.

Indian-made whisky currently accounts for more than 20% of the global whisky market and had the deal with United Spirits gone though, Diageo would have gained access to the Indian group's extensive distribution networks.

Data sourced from The Times and Financial Times; additional content by WARC staff