Menezes eyes long-term game plan

4th August, 2014 by Ron Emler

A glitch or a sea-change? That is the question about Diageo’s underwhelming full-year results for the year to 30 June.

DiageoOn virtually all measures, the world’s biggest premium alcohol producer under-performed analysts’ estimates despite issuing periodic statements to manage expectations down the year.

Pre-tax profits fell by 11.3% to £2.71 billion, while operating profit before exceptional items was 9.9% lower at £3.13bn. Total revenues fell by 8.5% while net sales were 9% down. Organic net sales, however, rose by 0.8% despite organic volumes being 2% lower. Organic volumes of Johnnie Walker, Smirnoff and Guinness fell by 6%, 1% and 5% respectively.

Chief executive Ivan Menezes admitted that the outcome was worse than he expected but pointed to several unforeseeable factors in the mix that have caused the shares to slide by about 10% over the past 12 months.

A “dramatic fall in sales levels” (78%) of the Shui Jing Fang baijiu as a result of China’s anti-extravagance drive meant a £264 million (£79m after tax adjustment) write-down in the value of the brand and forced Diageo to introduce less expensive versions of the spirit, the antithesis of its global premiumisation strategy.

In Kenya, sales of Senator Keg beer slumped by 80% in the wake of a swingeing excise duty increase while beer sales in Nigeria fell by 9% as fierce competition forced down prices.

The strength of the pound during the year wiped £800m from top-line sales, which translates into a £360m net hit. The effects were most noticeable in the US, Diageo’s largest market, Venezuela and South Africa.

Overall, emerging markets became more volatile as the global recovery stuttered.

On the plus side, however, sales from April to June were 0.8% up on 2013. North America, the most profitable market, is growing again albeit not uniformly and Europe has “stabilised”. Menezes expects the slump in baijiu sales to level out by the end of this year and said that emerging market volatility is “moderating”.

Most significantly, despite the weakness in emerging economies, which now comprise more than 40% of Diageo’s business, net sales of the “reserve brands” (including Johnnie Walker, Smirnoff, Bailey’s and Tanqueray, rose by 14% in the year and price increases drove higher margins.

A drive on costs will save up to £200m a year by 2017, three quarters of which will flow directly to profits. Much of that restructuring is already underway.

Menezes himself is bullish about the prospects, saying that in the next 12 months he expects both sales and profitability to improve. While issuing no specific forecast, he said “the top-line improvement will still be below long-term growth rates”. In translation, that means next year’s results will be improved, but not by much.

But the Menezes game plan is firmly longer-term. He points to Diageo gaining market share and expanding its margins in a disappointing year and believes that its new structure stands it in good stead to capture more market share from its competitors as demographics improve in its favour.

Forecasts suggest that the global market for spirits will grow to £18bn by 2017. Of that it is suggested that Diageo will take about £2bn in extra sales of Scotch and more than £1bn combined from vodka, Indian whisky and rum, while it will win extra sales of about £500m from North American whiskey, Tequila and gin. It will also take a third of the profits from the extra £2m-plus sales of Cognac through its 34% holding in Moët Hennessy.

Some of those extra sales will come from newly-won consumers in emerging markets where the proportion of potential drinkers in the population is likely to double from 8% to 17% by 2020. Even in more mature markets such as North America, demographics favour a switch to spirits from a growing population, especially of Hispanics.

In the high-price, high-margin super deluxe spirits categories Diageo reckons it has already overtaken Pernod Ricard for the top spot, holding a 13.1% global market share compared with just 8.9% three years ago. And with increased investment in product development and innovation, it is intent on increasing that share.

Further, gaining control of India’s United Spirits gives Diageo huge leverage in a market that Menezes foresees becoming even larger than China – and he remains bullish there despite the baijiu horror last year. Indeed, Menezes believes that within a decade India will be Diageo’s second largest market (after North America).

Of course, none of those hopes and targets will become profits until they are achieved. Menezes reckons he has the structure in place to do just that and as a sign of confidence, he has increased the dividend by 9%.

And despite the potential problems in emerging markets, he has more than £1.2bn free cash flow in his back pocket from last year as firepower for acquisitions or extra marketing drives.

The numbers are in his favour, at least in the long term. All he has to do is deliver.






Leave a Reply

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

Please note that comments are subject to our posting guidelines in accordance with the Defamation Act 2013. Posts containing swear words, discrimination, offensive language and libellous or defamatory comments will not be approved.

Subscribe to our newsletters

Job vacancies

Senior Customer Marketing Manager

Conviviality Group
London or Bristol, UK

Customer Marketing Manager- 12 month FTC

Conviviality Direct
London, UK

PR Account Executive

Clementine Communications Ltd
Fulham, UK

Marketing Manager

Berkmann Wine Cellars
London, N7, UK

Brand Manager

Berkmann Wine Cellars
London, N7, UK

Sales Account Manager

Jascots Wine Merchants
London, UK

Marylebone Sales Manager

Philglas & Swiggot
Marylebone, London, UK

Area Sales Manager

Bon Coeur Fine Wines
North England, UK

Procurement Assistant – Wine

Adnams PLC
Southwold, UK

Account Manager Central London

Speciality Drinks Ltd
London, UK

Brand Ambassador

Speciality Drinks Ltd
London, UK

National Business Development Manager

Speciality Drinks Ltd
London, UK

Marketing Assistant

Hatch Mansfield
Ascot, Berkshire, UK

Marketing Manager

Bancroft Wines
London, UK

The Global Sparkling Masters 2017

Deadline : 25th August 2017

The Global Malbec Masters 2017

Deadline : 25th August 2017

Global Chardonnay Masters 2017

Deadline : 1st September 2017

The Global Sauvignon Blanc Masters 2017

Deadline : 1st September 2017

Click to view more

The Global Rosé Masters 2017

With wines from the palest of pink to almost ruby red, bone dry to almost cloyingly sweet, reductively handled to barrel-aged, as well as gently spritzy to fully sparkling.

The Global Organic Masters 2017

The drinks business is thrilled to announce the launch of The Global Organic Masters

The Drinks Business Awards 2017

Now in its 15th year, the db awards have become the most authoritative, internationally respected badge of achievement in the alcoholic drinks industry.

The Asian Cabernet Sauvignon Masters 2017

the drinks business Hong Kong announces its first year of The Asian Cabernet Sauvignon Masters.

Click to view more