Corporate clues around the corner

By the end of this month we will have a much sharper picture of what is happening to the global wines and spirits business and how the major players are faring.

A raft of company results and what is said (and what is not said) in the accompanying statements will point to how management teams are gearing themselves up for what looks like being another difficult year.

The ball was set rolling earlier this week when the Distilled Spirits Council of the United States (Discus) announced the industry’s figures for 2009. It was widely known that the US consumer had traded down from premium to commodity brands, but the figures showed that the downtrend was not as acute as had been feared.

Revenues in the world’s biggest market were flat despite sales volumes rising by 1.4% to 187 million 9-litre cases. Volumes of the cheapest spirits were up by 5.5% but premium products suffered a 5.1% decline, so margins are being eroded. The strongest performing categories were Tequila, where volumes rose by 5.2%, and vodka (up 4.9%). Volumes of brandies, including Cognac, increased 3.3% in the year.

Against that backdrop, in the next couple of weeks both Diageo and Pernod Ricard, the global market leaders, are announcing their first-half results to the end of December. (Pernod Ricard’s data will reflect sales performance, with the financial numbers coming a little later, but the trends will be informative).

Premium spirits are the key to their business models so analysts and investors will be looking for clues as to whether they believe the worst of the trading down is over. For instance, Fortune Brands, which makes Jim Beam and Sauza, set a benchmark by saying recently that its spirits revenues actually rose by 3.5% in the final three months of 2009.

Following the purchase of Vin & Sprit in 2008, Pernod Ricard has been focusing on debt reduction, especially a €1billion programme of non-core asset disposals, of which about three-quarters has been achieved.

The company will be pressed for news of further progress, notably because margin erosion in the US especially, will affect progress towards its aim of being able to consider any new acquisition opportunities next year.

In the same vein, Diageo is on a cost-cutting drive. For instance, it has reshaped its plans for brewing in Ireland and moved many corporate functions out of central London. Reports suggest, however, that the company has declined a lure from the canton of Zug in Switzerland to relocate its headquarters there despite the tax incentives on offer.

Interest, however, is mounting about Diageo’s intentions in the rapidly-growing Indian market. Having walked away from a possible tie-up with VJ Mallya’s United Spirits, it has now secured official permission to take a 100% stake in its joint venture with Radico Khaitan.

This has been described by the Indian partner as a “technical measure” but it will be interesting to hear what Paul Walsh, Diageo’s chief executive, has to say on the subject at his results meeting next Thursday.

Later in the month Australian Vintage will also release its latest figures. The producer of the McGuigan wine range is also undergoing a restructure, but what most commentators will be seeking is clarification about the ongoing talks with Constellation Brands. They are discussing folding Constellation’s troublesome Australian and UK operations into a new company with Australian Vintage.

A deal is expected soon but reticence about it will indicate difficulties. Similarly, when Foster’s announces its latest figures in 10 days’ time, analysts will be looking for pointers about the fate of the Australian giant’s troubled wine empire.

Finance on Friday, 05.02.2010