City awaits half-year results

The industry is on tenterhooks as the world’s biggest drinks companies prepare to deliver their half-year results.

After last week’s announcement from LVMH , Diageo is set to announce its figures to the City tomorrow, with Pernod Ricard following in a couple of weeks.

A degree of anxiety exists among analysts over the extent to which Diageo has been hit by the challenging trading environments in key markets such as Europe and North America.

Ashley Everett Rountree, managing director for Europe at M&A advisors C.W. Downer & Co, told the drinks business: “Diageo is a terrific company and no doubt the strongest in the industry. However, the half-year results will show a challenging environment for them, especially in the US where they had enjoyed such strong growth.

“Diageo are good operators, however, and will have addressed the sales declines in North America and Europe with cost cuts to preserve profits.

“Analysts are pointing to volume declines in those two regions between 4% and 6% which is consistent with the market.”

Diageo generates approximately 30% of its revenue from emerging markets, which is less than many of its biggest rivals such as Pernod Ricard (32%) and Rémy Cointreau (35%).

This could hinder Diageo, seeing as emerging markets such as Brazil exited recession quicker than European and North American economies, while China and India continued to see growth in their economies while the rest of the world struggled.

“Diageo will be penalised by its relatively low exposure to emerging markets, where the growth continues,” said Rowntree.

“In China, Pernod Ricard has about twice the market share of Diageo, who in turn are about equivalent to Moet-Hennessy (mostly Hennessy) there. No doubt, this will make Diageo even keener to buy the MH out of LVMH.”

Rountree also predicted that Diageo’s dependency on premiumisation to drive growth would prove something of a hindrance in the current climate, with many consumers actually trading down in order to get better value for money.

Nobody expects Diageo to top the 145 million cases it sold in 2008 until at least 2013, and tomorrow’s results are likely to show a slight decline in the total volume of spirits sold by the company in the six months to the end of December last year.

However, operating profits may well enjoy a slight rise due to the cost-cutting measures the company has carried out over the past year.

Alan Lodge, 10.02.2010