Diageo growth curbed by currency impact

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Diageo, the world's biggest spirit group, has announced a drop in
first half profits, caused by foreign exchange rates, weak demand
in Europe and the continued decline of the ready-to-drink segment,
writes Chris Jones.

The British group reported pre-tax, pre-exceptional profits of £1.24 billion for the six months to 31 December 2004, down nearly 5 per cent on the previous year as the impact of weak European sales, rising duty rates and the Irish ban on smoking in bars all took their toll.

Turnover was also down, falling 2 per cent to £4.98 billion.

The UK, Ireland and Spain account for 64 per cent of Diageo's European volumes, and problems in those markets during the half had an inevitable impact on the company's results as a whole.

European sales were down slightly from £2.25 billion to £2.24 billion during the half, with a 12 per cent drop in turnover from the Smirnoff brand the chief culprit. This was due entirely to a 26 per cent decline in sales of the brand's ready-to-drink variant, which wiped out the 4 per cent increase in sales from the core brand.

The ban on smoking in Irish pubs and bars shaved 3 per cent off volumes there.

If Europe proved tough for Diageo, there was more encouragement from the rest of the world, with the Americas proving particularly good in terms of innovation, with the new flavoured vodka brand Smirnoff Twist in particular proving a hit. The new brand grew sales by nearly 30 per cent and now accounts for 20 percent of Smirnoff's US volumes.

Asia sales - dominated by Scotch whisky - were hit by the clampdown on consumer credit levels in Korea, one of the fastest-growing markets for whisky in recent years. The total Scotch category declined by 12 per cent in Korea, while Diageo's Windsor brand saw its volumes fall 21 per cent.

There was also trouble for Johnnie Walker in the increasingly competitive Taiwanese market, with a 47 per cent decline in sales as the brand lost out to a more price-friendly competitor.

Johnnie Walker's fortunes in China were somewhat different, however, with a 67 per cent gain in volumes helped by new marketing support designed to raise awareness of the brand and take advantage of the major gains in consumer spending levels.

Despite the obvious fluctuations in demand in many markets, it was exchange rates which impacted the results the most - the company forecasts that full-year profits will be some £80 million lower in both 2005 and 2006 as a result of forex problems.

Organic sales growth, excluding the impact of currency fluctuations, was a more respectable 5 per cent. In value terms, sales were also boosted by selected price increases for Smirnoff, Guinness and some of the group's Scotch brands.

The company's exposure to exchange rates is what is holding it back the most, according to analysts Goldman Sachs​. "All the good that Diageo's management is doing is foundering on some still volatile markets,"​ it said, highlighting the company's market leading stance on innovation and its particularly strong performance in the US, where other companies have struggled to grow.

But exchange rates are not the only dark cloud on the horizon, according to the analysts, with concerns over an apparent slowdown in marketing expenditure (it was up just 2 per cent for the half) and the ongoing poor performance of the company's premium gin brand, Tanqueray, in particular in the all important US market.

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