Captain Morgan Gold withdrawn as Diageo feels the economic bite

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It is barely two months since the world's number one spirits and
wine group announced 9 per cent organic sales growth for the first
half, but Diageo is already warning that growth in the second half
will be harder to achieve.

Just a day after its arch rival Allied Domecq announced​ full year results which were widely seen as positive, the world's number one spirits and wine group Diageo has presented a vision of the immediate future which is far less rosy.

Speaking at the company's annual general meeting, Diageo's CEO Paul Walsh said that the economic situation in the last two months had worsened considerably, and that the giant drinks group - whose brands include Smirnoff vodka, Captain Morgan rum and Baileys cream liqueur - would struggle to meet its financial targets if these conditions prevailed.

"Today, given world events and the more difficult world economic environment, current year targets do look increasingly challenging,"​ Walsh told shareholders. His warning also affected the company's share price, pulling it down nearly 8 per cent by yesterday's close; ironically, it also pushed down the price of Allied's shares, which had risen after that company's bullish statement.

The warning comes barely two months after Diageo reported​ first half organic sales growth of 9 per cent, well within its target. At the time, Walsh said that he expected Diageo to meet its targets for the full year as well, although with less ease than it had in the first half.

Commenting in more detail, Walsh conceded that the US market for ready-to-drink (RTD) spirits was more competitive than Diageo had anticipated, and that while its core brands were performing well in the main premium spirits market, it had decided to withdraw Captain Morgan Gold from the RTD sector.

The move is not unexpected, as he had confirmed at the time of the full year results that the brand had failed to perform in line with expectations, and that Diageo had taken a £24 million (€38m) writedown to cover the losses entailed by the failed launch. An additional charge of £18 million will be taken in the current financial year

Walsh added that Smirnoff Ice, Diageo's flagship RTD brand and US market leader, continued to perform well.

There was also less enthusiasm about Diageo's RTD brands in the core UK market, where Walsh said that the company's products had performed "relatively well in a category that has been hit by an increase in excise duty"​. He added that Diageo had decided to keep the price of its RTDs competitive despite the duty hike, and that the company expected further growth in this category following the launch of a new line, Smirnoff Black Ice.

The news was better from Ireland, where Guinness has increased its share of the draught beer and cider category in the Republic after a period of decline. The successful introduction of Smirnoff Ice on draught has resulted in volume growth in the RTD category.

Sales in Spain were hit by the economic downturn there, with Scotch whisky volumes down during the last two months. There was a slight increase in the market share of Diageo's blended Scotch J&B, however. The decline in Scotch sales was offset by strong growth in the dark rum category, however, where Diageo has two strong brands - Cacique, which it acquired from Seagram, and Pampero.

But it was Latin America which took the greatest toll on the company in the last few months, with the economic climate in Brazil and Venezuela worsening since the beginning of the current financial year and at the end of the first quarter operating profit in Latin American key markets was down approximately £15 million against the prior period.

"Diageo has faced economic pressures of this nature before and is using the expertise already built to mitigate its exposure. Diageo continues to focus on long-term brand building to protect its future and to grow share for its brands,"​ the company said in a statement.

Despite the troubles in the RTD sector in some markets, Diageo clearly sees this as a major source of revenue growth in years to come. Walsh said that sales in Germany had been boosted by the recent launch of Smirnoff Ice, and that global sales of RTD products were strong, posting double-digit volume growth in the first quarter of the current financial year.

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