Premium drinks continue to boost Diageo profits

Related tags Smirnoff ice Diageo

Strong organic growth from the premium drinks business was one of
several key drivers of growth at Diageo, the UK company which is
now wholly focused on its beer, wine and spirits business. Smirnoff
Ice and other RTD brands performed particularly well during the
first half.

The core premium drinks business of Diageo, the world's largest spirits company, again proved the main driver of growth in the first half. The company, which has now sold its Pillsbury food business and is in the process of closing the sale of the Burger King restaurant group, is now fully focused on drinks.

The company reported turnover of £11.3 billion (€20.1bn) for the first half of 2002, with operating profits of £2.12 billion. While this represented a decline compared to the year before in actual value terms, this is due almost entirely to the changes in the company's structure. Organic growth, a much better indication of the company's actual performance, was 8 per cent for volume sales, 9 per cent for operating profits and 13 per cent for operating profits from premium drinks.

Nick Rose, Diageo's chief financial officer, said that the operating profit rise for premium drinks was the third increase in succession, and reflected a 4 per cent rise in organic volumes and a 9 per cent rise in organic retail sales value during the half.

The UK and North America, traditionally Diageo's strongest markets, continued to be the main drivers of growth, with organic operating profit growth of 30.6 per cent and 17 per cent respectively.

The company's global priority brands, which include Smirnoff, Bailey's and Johnnie Walker, posted organic volume growth of 8 per cent, with Bailey's up 10 per cent and Smirnoff up 21 per cent including the Smirnoff Ice ready-to-drink (RTD) brand.

Diageo has been at the forefront of the RTD category, which is already huge in the UK and growing rapidly elsewhere. Rose said that Smirnoff Ice had almost doubled its sales to reach 4.7 million equivalent cases, helped by the launch of the product in the US, but that other new RTD products such as Gordon's Edge in the UK, Archers Aqua in the UK, Johnnie Walker One and J&B Twist in Spain had also contributed to the overall performance. A new variant of Ice, Smirnoff Black Ice, is being launched soon in the UK, Rose added.

He admitted that the Captain Morgan Gold RTD product had been a disappointment, however, since despite successful initial trials the repeat purchases of the brand had not materialised.

"Smirnoff Ice has been such a runaway success that we perhaps lost sight of the fact that launching an RTD product is difficult,"​ Rose said. "The taste profile for Captain Morgan Gold is not right yet, that is clear, but this is not the end of RTDs by a long shot. The success of our other products shows that there is still a market there, and while the UK is full of RTDs, the US and elsewhere are just starting."​He added that the company had taken a £24 million writedown to cover the failure of Captain Morgan Gold.

As well as its global brands, the company has a number of local priority brands, chief among them Crown Royal, the Canadian whisky brand acquired as part of the Seagram deal. Rose said that this was a highly profitable brand, and he expected to see further growth in the second half.

Elsewhere, the Dimple whisky brand in South Korea had suffered because of a change of distributor, but now that the brand had come in-house Rose said he expected to see an improvement in what is still a huge market for Scotch.

Economic troubles in Latin America impacted results there, and there is no sign of an immediate recovery, Rose added. The group's main business is in Brazil and Venezuela, both of which saw their currencies devalued during the half, but Rose said that profitability had been maintained in Latin America despite lower volumes.