Has the recession strengthened drinks firms?

Is recession good for business? It may not feel so at the time, but as Finance on Friday has pointed out frequently, those companies with astute, flexible managers are able to take advantage of competitors’ weakness and are best placed to profit when the upturn finally comes.

This is borne out by a recent survey for American Express which showed that 58% of the UK’s senior finance executives believe that decisions made during the downturn have actually improved their firms’ long-term prospects. And there is strong evidence of this in the drinks sector.

The underlying theme of all recent company pronouncements has been that life remains tough and that it will do so for some time, not least because the global economy remains fragile. In Britain we face a further squeeze on consumer spending.

Yet both Diageo and Pernod Ricard reported resilient third quarter trading and underlined their guidance that their full-year profits will show organic growth.

On the parochial level, Mitchells & Butlers, one of the biggest UK pub operators, has achieved a strong rise in first half profits to £72 million compared with a £16m loss last year.

The group is focusing increasingly on high margin food to pay down its £2.5 billion debts, but despite considerable boardroom upheaval in the past 12 months, is contemplating paying a dividend from the autumn.

That will depend on trading in the next few months, but in the nine weeks to 15 May like-for-like sales were up 1.9%, echoing the trend reported by JD Wetherspoon. Even so, a minor blip in consumer spending could turn the trend negative.

Similarly, Marston’s has reported an “encouraging” performance in the six months to 3 April and says that while remaining cautious, it continues to progress and “sees opportunities to develop the business”.

In the next couple of weeks both Fuller, Smith & Turner and Young & Co are predicted to announce comparatively buoyant trading and to demonstrate the resilience of their business models, based on high margin, quality offerings.

In the same vein Majestic’s results on 14 June will be scrutinised for further information about trends. Coming within just a few days of the new government’s first Budget on 22 June, they will be hedged with caveats, but Majestic’s business has been strengthened over the past year by a number of factors, not least the demise of First Quench, which effectively gave it a unique specialist presence on the high street.

It has bolstered that by cutting the minimum purchase to six bottles (from 12) thus further rivaling the supermarkets. And at the other end of the spectrum increasing offerings of fine wine are paying dividends despite the difficulties in the corporate market.

So while trading remains difficult – and many expect it to deteriorate later this year – solid companies continue to progress and make profits. Failures are more spectacular, but so far at least, there have been comparatively few.

Finance on Friday, 21.05.2010