Drinks companies show growth despite crisis

Crisis? What crisis? Judging from results published this week by four of the world’s major drinks companies, you might be forgiven for not noticing that the global economy remains fragile.

Figures for the July to October quarter from Diageo, Pernod Ricard, LVMH and Rémy Cointreau all exceeded analysts’ estimates.

Using the measure of organic revenue growth, which strips out acquisitions, extraordinary items and currency fluctuations, Diageo’s sales in the three months rose by 9% year on year, Pernod Ricard’s put on 8%, Rémy Cointreau’s shot up by 18% and LVMH’s Moët Hennessy wine and spirits arm advanced by 11%.

To put those figures in perspective it is worth noting that the three months under review represent the lowest part of the annual sales curve – they contain no “festivals” such as Thanksgiving, Christmas, Easter or the Chinese new year – and the same period in 2010 offered very weak comparisons; destocking then was prevalent, notably in Europe.

That said, however, the fact that all four groups made strong sales gains based on increasing margins from premiumisation, especially in emerging markets, points to a pattern of spirits drinkers trading up and volumes increasing.

LVMH finance director Jean-Jacques Guiony said the French luxury group was “proud to disappoint the pessimists”. Rival companies were less bullish, but Diageo confirmed its guidance that organic sales growth (which relates to profitability) over the medium term would rise by 6% in the year to next June.

Meanwhile, Pernod Ricard’s Pierre Pringuet said his company would achieve a 6% rise in organic profits over the same period.

Analysts suspect that both companies were erring on the side of caution. Pringuet denied that he was being conservative. “We announce what we’re absolutely sure to deliver”, he said. Equally, although Diageo’s Paul Walsh stressed the delicate nature of the global recovery and the threat of slipping back into recession, he knows that the market will look unfavourably on any profit growth of less than 6% in this financial year.

And while analysts and investors were duly impressed by the figures from all four groups, they continue to worry that the buoyancy in demand, especially in Asia and Latin America, could be tempered by renewed recession in America and Europe.

The rapid emergence of these newer markets over a comparatively short term means that there are few signposts as to what will happen if they are affected by slowing global demand.

China’s economic growth is slowing (but to a more sustainable rate) and it has not gone unnoticed that Bain & Co’s annual study of luxury goods published this week deliberately avoided a forecast for 2102 because of “uncertainty”.

But as others pointed out, the uncertainty is not new and demand for luxury goods, including premium wines and spirits, is based on more than simple disposable income. Social trends, ostentation and the desire to show off wealth all play their parts in the mix.

And sensible analysis of the relevant share prices shows that none of the leading drinks groups is overpriced. They all remain fairly valued, with scope for upside if the latest quarter’s sales trends become a firmer pattern.