You are currently viewing the International Edition. You can also switch to the Hong Kong Edition.
Tuesday 30 June 2015

Drinks profits slow as economy recovers

3rd February, 2014 by Ron Emler

There is a dichotomy between the global economy moving out of recession and wine and spirits companies experiencing slowing profits growth.

Ivan MenezesThe pattern is evident in the latest results from Remy Cointreau, Treasury Wine Estates and Diageo, although LVMH appears to have bucked the trend in its drinks operations.

Commenting on his group’s profits growth slowing to 1.8% in the three months to Christmas, Diageo chief executive Ivan Menezes noted that consumer patterns around the globe were changing more rapidly than at any time during his 30 years in the drinks sector. While there were specific regional variations caused by local conditions such as the anti-extravagance measure in China and GDP growth in emerging markets as a group slowing to between 4% and 5%, the key to future profits growth was “acting like a small company” and adapting quickly to changing consumption patterns or external factors such as duty changes in Kenya and Turkey.

While Menezes expects the half year to the end of June to show some improvement, he no longer quantifies Diageo’s profitability target. In the three-years ending in June the target was annual average organic growth of about 6% and a 200-point improvement on margins. The latter will be achieved but Menezes now talks of a nebulous performance target of “being in the top quartile” of net sales value growth among leading consumer goods companies.

Reading between the lines suggests that an era of less dynamic profits growth is ahead. The US recovery is “uneven” and Menezes remains “cautious” about Europe, but still the biggest impetus will come from emerging markets, which now account for 42% of Diageo’s turnover.

Menezes is about to mount a cost-cutting drive that will generate savings of £200m a year by 2017 through improving logistics and “delayering” regional operations (he won’t say if jobs will be lost). This, he says, will mean that Diageo is well placed to reinforce its position as the world’s leading premium alcohol group. For instance, the premium core brands such as Johnnie Walker, Smirnoff, Guinness and Captain Morgan now account for 60% of the group’s turnover. And his first priority is to “strengthen and accelerate” those global giants. Reserve brands such as Ciroc and Don Julio must “win in every market”.

Diageo, he says, has a 75% share of the market for deluxe scotch in emerging markets. And he underlines that while growth in those regions may be slowing in aggregate, they are still developing more quickly than established markets in America and Europe.
And where change has hit Diageo negatively, Menezes is confident he will be best placed to come through the transition on top. For instance in the baijIu category Shuijingfang is said to have suffered a 66% slump in the past six-months as the Chinese anti-extravagance drive bit. But Diageo did not slash prices in pursuit of volume and he is confident that the category will be “back in growth in 2015….. the category is healthy”.

Similarly, following the loss of Jose Cuervo, Diageo is “committed to recovering profits” from the tequila sector and has “moved very quickly” to augment its portfolio by buying Peligroso and partnering Sean Coombs with De Leon. Don Julio, which grew by 26% in the half year, remains the prime offering, but Menezes says Diageo has “enough scale to regain its [market leading] position.” He also hints that there may be more developments in this sector.

NIche takeovers will be on Diageo’s menu as and when Menezes can find the right targets at a competitive price. And although he declines to comment on Suntory’s $16bn swoop on Beam, he says: “It was an asset that was going to go…it was not high on our priority list”, adding that “Suntory’s action shows what a fantastic business [global spirits] is and what fantastic brands we have.”
Sources in Diageo say that any takeover is governed by two factors – how much value can be added and how long you are prepared to wait for it to flow through. The need for Suntory to spread its global wings, they suggest, made Beam a very different proposition from a Tokyo perspective than from St James’s Square.

The same criteria apply to San Miguel’s beer and spirits businesses, which are reported to have attracted offers of $6.6bn. Menezes refuses to admit or deny interest as a matter of policy but any deal would be complicated by Kirin’s 48% stake. Nevertheless, someone in Diageo will be running the numbers… just in case.

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>

If that's interesting, how about these?

Top 10 wine brands 2015

In a year that saw major shifts in the global wine market, the drinks business more...

Top 10 worst estates for en primeur returns

Using Liv-ex's data, db rounds up the worst 10 châteaux for en primeur more...

Top 10 US craft breweries

The Brewers Association has released its annual list of the biggest US craft more...

Social Media Editor

Competitive

Top 10 Negroni spots in London

As the Campari Red Night District takes over London's Shoreditch, we round up more...

Top 10 architectural wonders of the wine world

You don't have to look far to find stunning examples of architectural prowess more...

Suntory's exquisite 3D-printed ice cubes

As far as advertising campaigns go, this collection of miniature ice cube more...

Diageo closes in on £200m Gleneagles deal

Drinks giant Diageo is reportedly “close” to agreeing a sale of its luxury more...

Top 10 new products

This month's top releases include a Champagne tankard designed by Pol Roger, more...

Top wines of Bordeaux 2014

The 10 best wines of the Bordeaux 2014 vintage as voted for by Liv-ex’s more...

UK Sales Manager

London, United Kingdom

Top 10 banned alcoholic drinks

The drinks trade has seen its fair share of drinks banned from public more...

Top 12 Australian fine wines

Australian fine wines have made the headlines of late. But what are the names more...

Top 10 ‘medicinal’ drinks

From a herbal elixir created by Carthusian monks to bitters invented to cure more...

Sales Executive - Wines & Spirits Competitions

London, United Kingdom

Competitive

How to become a 'wine expert' in four hours

A doctor of psychology has devised 10 simple steps which he claims can set you more...

World's most extravagant wineries

With Château Margaux preparing to unveil its new winery and cellar, designed more...

Fascinating facts worth knowing about beer

Think you know everything about beer? This collection of beer-related facts more...

Warehouse Supervisor

London, United Kingdom

£27,000-£30,000 depending on experience

10 richest people in the UK drinks trade

As The Sunday Times Rich List 2015 reveals the wealthiest individuals in more...

Top 10 estates for en primeur returns

db rounds up the 10 best Bordeaux estates for en primeur returns on more...

Top 10 modern wine drinker stereotypes

From Rioja lovers to Champagne quaffers, the drinks business has more...

Head of On-Trade Sales

London, United Kingdom

The London Wine Fair in pictures

From red trews and foie gras macaroons to 2CVs, wine on tap and temporary more...

Top 10 ways to reuse a wine bottle

If you are anything like the db team, it won't take long to amass a collection more...