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Diageo reports lacklustre annual performance

Category: Investors NewsBeat

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Diageo reports lacklustre annual performance

August 27, 2010, Julia Kollewe

• Diageo results hit by weak US and European markets

• Sales in Latin America and Africa help profits edge up 2%

Diageo, the drinks group behind Smirnoff vodka and Guinness, served up a lacklustre annual performance due to weak US and European markets, while Latin America and Africa enjoyed strong sales of scotch, rum and beer.The world's biggest drinks-maker saw operating profits edge up 2% to £2.75bn in the year to the end of June. Revenues climbed 5% to £9.78bn.

Profits were propped up by emerging markets. In Latin America and the Caribbean buoyant sales of scotch, led by Johnnie Walker, and rum, led by Cacique, resulted in 15% net sales growth. In Africa sales climbed 10%, driven by lager, in particular Harp in Nigeria and Tusker in Kenya.By contrast, in the US sales by volume were down 2% and net sales 3% lower, while in Europe volume rose 1% but net sales fell 2%. The UK was a bright spot, with volume up 9% and net sales 5% higher, driven by double-digit volume growth from spirits and wine.

Paul Walsh, the chief executive, said he hoped for a "gradual" improvement in US sales. "As expected, this has been a year of challenges and opportunities," he said. "Our performance was much stronger in the second half than in the first. Our performance in the developing markets drove overall growth, while markets in North America and Europe remained weak."

Jeremy Cunnington, a liquor market analyst at research group Euromonitor International in London, said cash-strapped Americans and Europeans preferred to buy Diageo's cut-price products. "In Europe, the company managed to see volume growth but at the expense of value," he said. "Even in fast-growing emerging markets, volume growth came at the expense of value, such as in Brazil and a lesser extent in China, although the latter was also helped by heavier marketing spend."

Diageo expects stronger growth in the coming year, once again driven by emerging markets, as there are few signs of recovery in Europe. In the US, however, consumers are slowly starting to return to pricier brands. The drinks firm has heavily invested in marketing there, lifting its spending by 20% in the second half.Johnnie Walker is the company's best-performing brand, with its Black Label version seeing double-digit sales growth worldwide due to demand in emerging markets. Smirnoff sales were lower amid "intense" competition in the vodka market and a 7% drop in sales in North America.

Guinness, which makes up a little over half of Diageo's beer sales, had flat sales with strong double-digit growth in South East Asia offsetting a 2% decline in Europe and flat sales in Africa, where people traded down to cheaper lagers. In Britain and Ireland, Guinness once again gained market share, although sales were down due to the continued decline of beer.

"Overall it was a very lacklustre performance," said Rob Mann, analyst at City broker Collins Stewart. He noted that Diageo raised its marketing spending by 14% to achieve just 2% of organic volume growth over the year. But Diageo's finance chief Nick Rose defended the increase in advertising spending. "This is us getting ready for the upturn when, and however, that arrives," he said.Diageo increased its final dividend by 6% to 23.5p a share and expects to at least maintain this rate of dividend growth in the current year.

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