Savvy management key to profits growth

Consumers have traded down significantly over the past 18 months; the trends highlighted in results from drinks groups such as Diageo and Pernod Ricard are testament to that.

What has been less widely recognised is that nimble management and careful control of costs can generate profits growth against such a negative backdrop. Nor is it only retailers with colossal buying power who have swollen their profits; producers have also done so.

For instance, Diageo and Pernod Ricard are both confident that they will record operating profits growth and market share gains in their current financial years – no mean achievement when viewed against their surging progress before Christmas 2008. Meanwhile, Morrison’s has just reported a 30% rise in annual profits.

The Bradford-based group’s pre-tax profits rose to £858 million in the year to 31 January, from £655m the previous year, with revenues up by 6% to £15.4 billion.

That rate of growth eclipses Morrison’s high street rivals, Tesco, Sainsbury and Asda and is even more noteworthy because Morrison’s has stuck to its last as a grocer, eschewing expansion into areas such as clothing and homewares.

There are two significant figures in Morrison’s results. First, like-for-like growth in existing outlets rose by 6%; second, sales of the own-label “value” range rose by 34%, highlighting how extensively the consumer has tightened the purse strings.

In the same vein, JD Wetherspoon, the value-driven pub chain, posted record first-half profits in the six months to January 24. Turnover was up 4.1%, but pre-tax profits (including exceptional items) soared by 41.4% to £36.2m. Before exceptional items, pre-tax profits rose by 17.5%. Operating margins remained unchanged thanks to a drive on energy costs that offset increased expenditure on repairs.

What impressed shareholders was the fact that Wetherspoon had negotiated a new £530m debt facility which chairman Tim Martin says will be invested in plans to increase new pub openings at a rate of 50 each year for the next decade, taking the nationwide estate to about 1,200.

As the recession bit, Wetherspoon scaled back its programme of openings and extensions to preserve cash. Now it is well placed to take attractive properties from harder-pressed rivals. The group also promoted itself heavily over the past year, notably with meals for £2.99 and a pint of bitter for just 99p.

These aggressive marketing tactics have paid off, making Wetherspoon one of the most successful pub groups during the recession, so much so that it is paying a dividend again after putting payouts to shareholders on hold last year in the interests of longer-term returns.

As the results season enters full swing, investors will be using companies such as Diageo, Morrison’s and Wetherspoon as benchmarks of performance. Blaming the recession will be a poor excuse for weak figures; good managers come to the fore in hard times.

Finance on Friday, 12.03.2010