Diageo branding overcomes temporary setbacks

the RTD markets in the US and UK are a slight cause for concern as the group extends its presence in this sector in other important markets. The sale of Diageo's Burger King unit and its conversion to a pure drinks group was finally completed during fiscal 2003, and the company's results released today already show the benefit of that transformation.

Although the sale of BK, and of Pillsbury a year earlier, took their toll on total group sales, reducing them by 16 per cent to £9.4 billion in the year to 30 June, turnover from continuing operations increased by 2.9 per cent to £8.9 billion, a good performance given the numerous factors adversely affecting the company during the year such as the war in Iraq and the SARS outbreak in Asia.

The year also saw the completion of the integration of the various Seagram brands acquired in 2001, helping increase sales by £1.2 billion.

Operating profits were up 12.5 per cent on a reported basis, reaching £1.86 billion, including a £53 million contribution from Burger King (compared to £319 million a year earlier which also included Pillsbury). The improvement was also helped by a £300 million reduction in exceptional charges to £168 million.

Diageo​ has come a long way since its creation in the mid 1990s via the merger of Guinness/UDV and Grand Metropolitan, but the decision to focus solely on premium drinks has undoubtedly been a good one.

Already the world's largest spirits group, the addition of a number of strong Seagram brands such as Captain Morgan to its already impressive portfolio of Smirnoff, Johnnie Walker, Baileys, Jose Cuervo and Tanqueray, has helped Diageo extend the gap to its nearest rival, Allied Domecq.

Premium drink volumes - the group's wine, beer and spirits brands - increased by 5 per cent during the year, helped by the Seagram acquisition, although organic growth from the group's core brands was 1 per cent. Within this, organic volume growth of the global priority brands (the six mentioned above plus Guinness and J&B Scotch) increased by 3 per cent, partially offsetting a 1 per cent drop for local priority brands and a 3 per cent decline for all other brands.

Ups and downs​

But it has not all been plain sailing for the group in the last year. The failure of the ready-to-drink version of its leading rum brand, Captain Morgan Gold, in the US market showed that even the biggest players sometimes get it wrong. The RTD category as a whole, led by the various Smirnoff spin-offs, continued to perform well, however, with the roll out in several continental European countries, including a high profile launch in France, the main driver of a 5 per cent rise in volumes.

In value terms, premium drink brands posted sales of £6.6 billion during the year, up 3 per cent on the previous year, with organic revenues from the priority brands ahead 5 per cent. However, RTD revenues were down 4 per cent to £785 million, mainly as a result of the Captain Morgan withdrawal. Organic sales growth for RTDs was 3 per cent.

Smirnoff remained the group's biggest selling brand, accounting for 23 million units of a total of 119.3 million sold during the year, up 6 per cent in volume and 8 per cent in value. Smirnoff volume excluding ready-to-drink was up 6 per cent and net sales were up 10 per cent. A unit is a nine-litre case of spirits, and all non-spirit brand sales have been calculated on an equivalent basis.

Guinness was the second-largest brand, with sales of 11.4 million units, up 2 per cent inn volume and 6 per cent in value, followed by Johnnie Walker with 10.8 million units, up 2 per cent in both value and volume.

Baileys sales rose 10 per cent in volume to 6.2 million units, pushing up value sales by 13 per cent, while Jose Cuervo tequila posted a 7 per cent gain to 4.2 million units, increasing value sales by the same amount. Tanqueray, the group's premium gin brand, saw a 3 per cent rise in volumes in 1.9 million cases, but value sales rose 7 per cent.

Not all of the group's leading brands improved, however. J&B sales fell by 5 per cent in volume and 6 per cent in value, although the brand still accounted for 6 million units. Captain Morgan also saw its sales fall, with a 1 per cent decline in volumes to 2.5 million units and 12 per cent decline in value sales (second half figures only). Excluding Captain Morgan Gold, volume of Captain Morgan was up 11 per cent and net sales were up 14 per cent.

RTDs struggle in US, UK​

Turnover in North America increased 5 per cent from £2.8 billion, primarily due to the turnover derived from the Seagram brands. The effect of brand disposals and of exchange rate movements shaved £342 million off total turnover there.

The low point of the year in North America was the trouble encountered in the RTD sector, with the withdrawal of Captain Morgan Gold and an 11 per cent drop in Smirnoff RTD volumes. In contrast, Baileys volumes were lifted by strong advertising and the launch of Baileys Minis.

Turnover in the UK was 3 per cent lower at £1.4 billion due to the loss of the distribution rights for Jack Daniels and Southern Comfort in August 2002 which reduced turnover by £108 million. This was partially offset by a £17 million gain from the Seagram brands in the UK.

The much publicised downturn in the UK RTD market was evidenced by a 3 per cent drop in Smirnoff premix volume during the year, while value sales dropped 11 per cent as Diageo swallowed the impact of higher duties. However, the brand grew its share of the market by 2 percentage points, evidence that some of the 4 per cent UK market decline is coming from the disappearance of minor brands as well as the duty increase. Even the world's largest drinks company is not immune to the vagaries of the global economy, and Diageo's performance in a number of markets was affected, notably Ireland, where Guinness continued to struggle, and Spain, where J&B and Johnnie Walker sales declined in what is traditionally one of Europe's biggest Scotch markets.

Africa, which is Diageo's second largest market by volume, improved during the year, with an 18 per cent rise in turnover and a 6 per cent rise in volumes. In Latin America, overall volume declined by 16 per cent, mainly due to a sharp downturn in Venezuela.

In South Korea, Windsor, the leading Scotch whisky brand, gained share in the year and volume grew by 1 per cent in the second half. In Taiwan, the key driver of volume growth of 9 per cent was Johnnie Walker which increased 9 per cent, although the brand suffered a 17 per cent decline in Japan, contributing to a 1 drop in overall volumes.

Global Duty Free volume was level despite the impact of the Iraqi conflict and the SARS outbreak on world travel, helped in part by the launch of Smirnoff Ice in a number of Duty Free markets.

So, a solid performance in tough conditions, and one which was undoubtedly helped by the steady overall performance from the company's core priority brands. With a renewed focus on premium drinks, Diageo is well placed to further extend its lead over the opposition, although the problems in .