Shoots of hope amid gloomy figures

Yesterday’s figures from Diageo may appear a little disappointing at first glance, but they do contain some grounds for optimism. 

In the first three months of this year the company’s organic net sales fell by 7% compared with the comparable period in 2008. The world’s largest wines and spirits group says this outcome was mainly due to a planned stock reduction among US distributors. Inventories in the US were about one million cases lower than at the end of December, reflecting the impact of the recession in the world’s largest premium drinks market.

Chief executive Paul Walsh (left) confirmed that trading had declined as the global recession has tightened, pointing specifically to the difficulties being faced in Russia and the duty free travel market. On a reported basis, however, net sales for the quarter were still 11% ahead of last year and Diageo’s chief was able to confirm his forecast that organic operating profits for the year to 30 June will grow by between 4% and 6%. Many other FTSE 100 Index chief executives would regard that as a triumph in present circumstances.

Overall, Diageo’s reported net sales in the nine months to the end of March were up 16%, largely reflecting the fall in the value of sterling against the euro and especially the dollar over the past year. In effect, Diageo and other exporters, notably those of Scotch whisky, are getting more pounds for their products than they were a year ago.

As Finance on Friday has pointed out on several occasions, however, sterling’s slump has given Britain’s wine and spirits importers a severe headache as overseas producers demand extra payments to compensate for the weaker exchange rate and retailers resist compensatory price rises to maintain wholesale margins. Now though we may be seeing some signs that the pain could be about to ease.

For a start, sterling has been creeping up against the dollar over the past month, but more importantly the depth of the global recession and its impact on the major European economies such as Germany is becoming clearer. That is why the European Central Bank cut its interest rates again this week, bringing them more into line with those in Britain and America and in the process signalling that the euro should weaken. 

The respected forecaster Capital Economics suggests that the euro could fall to about  €1.25 to the pound later this year. While nobody can see sterling rising to just below the €1.50 it achieved some 18 months ago, any improvement would be welcomed by drinks importers.

Finance on Friday, 08.05.2009