Diageo’s Walsh puts faith in premiumisation

Strong sales figures in the US have left Diageo confident that premiumisation will deliver growth in the medium term.

"While the global economy appears to be stabilising, there is still uncertainty as to the sustainability and pace of any recovery and 2010 will be challenging," chief executive Paul Walsh said when announcing the group’s annual results yesterday.

“I see no structural changes that will have a long-term effect on the sector”, he said, praising the group’s breadth of portfolio and fleetness in reacting to the rapidly changing market dynamics of the past year.

“We are continuing to build brands through premium offerings”, he said, emphasising that the group is focused on “value rather than volume growth.” As evidence of its success Diageo pointed to the 159% net sales growth in the US of Ciroc vodka while Walsh revealed the Ketel One vodka had exceeded all expectations and is now selling almost 2m cases a year in America alone.

On the other hand, he conceded that, in the short term, growth of ultra premium lines has slowed from about 20% a year to “around 5%” and that Diageo “is giving more attention to sharper price point brands than we were 18 months ago” to meet the continuing swing towards off-trade consumption.

Operating profit in the 12 months to the end of June (excluding exceptional items) was £2.61bn, at the bottom end of the company’s revised forecast of a rise of between 4% and 6%. Pre-tax profits slipped to £2.02bn from £2.09bn, partly as a result of £166m of costs linked to the group’s restructuring programme. Nevertheless, earnings per share rose by 10%  and the group generated free cash flow of £1.2 billion

Walsh forecast operating profit growth in the "low single digits"  for Diageo’s current finacial year.

Diageo said sales of  vodka, tequila, rum and Guinness had all held up well, while scotch and liqueurs were hit by retailers reducing stock levels and the squeeze on consumer spending.

He said that there were signs that the Asia Pacific market might emerge the quickest from the recession but that Europe (especially Spain and Ireland) continues to present “tough trading conditions”.

Diageo forecast growth in the “resilient” North American market in the coming 12 months but said that overall global trading would remain relatively weak. Finance director Nick Rose predicted price rises this year of about 1% in order to protect volumes, which fell 4% in the year to June.

While Walsh pointed to the potential of emerging markets he said he had no regrets about ending talks about taking a possible stake in VJ Mallya’s United Spirits, the largest player in the Indian market. “I know his valuation. You don’t,” he said to underline why Diageo would now seek other routes to expand in the sub-continent.

Finance on Friday, 28.06.2009