Diageo: Playing the numbers game

on 31 January, 2014

Playing the numbers game Diageo’s interim results for the six months to December 31 which were reported yesterday (January 30), make bleak reading.

Volume down 3%, compared to the same half year in 2013. Volumes in every region are down: North America (2%), Western Europe (2%), Africa, Eastern Europe and Turkey(4%), Latin America and the Caribbean (2%) and the all-important these days Asia Pacific region (4%). Only Diageo’s heartland, North America showed an operating profit of 8%.

Net sales grew by a modest 1.8% and the operating profit: 2.9%.

But it was far from doom and gloom at the presentation given by new CEO Ivan Menezes at the London briefing for journalists and city analysts.

Although volume and therefore cash flow is vital even to the largest premium drinks company in the world by a country mile, it is fair to say that Diageo is not a box or bottle shifter. So new man Menezes was extremely upbeat in a consummate presentation aimed at assuring shareholders, investors, analysts, not forgetting employees.

He did concede that the half year had been “tough” but from there on it was onwards and upwards.

He pointed out that net sales in Diageo’s engine room, North America were up 4.6% and in the strategically important emerging markets where 42% of their sales come from, sales were up 1.3%. He put that modest growth in the latter down to the problems in the Nigerian beer market with excise duties and the effect on baijiu of the Chinese government’s clamp down on gift giving and entertaining.

Menezes was quick to point out that its newly acquired Chinese company Shui Jing Fang has not been so adversely affected because it is a more consumer focused brand and business.

As we all know Cognac volumes and profitability has been slaughtered by the Chinese government’s decision – witness the bloodbath that appears to be occurring at Remy. Of course, Diageo’s doesn’t own a Cognac brand outright, much as it would ultimately like to get its hands on Hennessy from LVMH.

He pointed out that Baileys, the cream liqueur, had created a new category in China and the new ‘real’ Belgian chocolate variant was going to take the brand to a new level.

At the start of his tenure, Menezes outlined six “key performance drivers”: strengthen and accelerate premium core brands; Win ‘reserve’ in every market: innovate at scale to meet new consumer needs; build and extend its advantage in route-to-consumer; drive out costs and ensure it has the talent to deliver its performance ambition.

He acknowledged that in some markets “remained challenging” and by way of a ’sting in the tail’ for employees Menezes announced: “Over the next two months we will set out detailed plans to simplify our processes and de-layer our organisation. This will create a more agile, accountable and effective organisation to deliver our performance ambition. I expect this to deliver cost savings of £200 million a year by the end of fiscal 2017.”

When asked about redundancies, Menezes would not be drawn but it is obvious that his de-centralising, pushing accountability down to the regions and streamlining logistics, will mean job losses.

Emphasising the increasing importance of its super premium luxury brands, Menezes hailed the success of its ultra premium French vodka Ciroc along with Johnnie Walker Platinum, Gold Label Reserve and Blue, Smirnoff Gold and Talisker.

Diageo North America president, Larry Schwartz, says in the interim report: “Our Reserve brands grew 26% driven by Ciroc, Bulleit, Ketel One and Johnnie Walker.”

Volumes of Smirnoff, the world’s best-selling premium vodka, are down in the US. Menezes and Schwartz put that down to increasing competition in the standard vodka category but the company has resolved to hold the price as part of its long term strategy to build premium brands and innovate.

While the beer market is tough in Nigeria, Menezes said: “The spirits opportunity in Africa is huge.” He went on to say Latin America and the Caribbean had seen 8% growth net sales while they had seen 30% growth in Cachaca in Brazil.

The interim report stated that Diageo has bought an additional 1.35% equity share (1.97m shares) inIndia’s United Spirits, owners of Whyte & Mackay and Dalmore, taking its share to 26.37%.

Menezes told the press conference that United Spirits has reported a 35% increase in net sales. In calling it a “great start”, he warned: “India is a sophisticated but still emerging market. There are challenges and volatility.”

He reported that Bell’s Scotch and Bushmills Irish whiskey were performing well in Russia, assisted by a sales force that has been doubled in numbers.

The Diageo mission statement is to be one of the “best performing, most trusted and respected consumer products companies in the world”.

Menezes said the company was not “ideally structured” hence the need to reorganise. The target is to save £200m by 2017.

During questions, Menezes was asked to comment on the Suntory takeover of Beam. He smiled, laughed but refused to be drawn.

On the Scottish question (possible independence), he said: “It doesn’t change our plans for whisky”, but he agreed that they were monitoring the situation closely and “assessing the implications”.

On Tequila he expressed his delight at the joint venture with Sean Combs’ over prestige Tequila brand DeLeón and the more recent purchase of super premium Tequila Peligroso. He said that along with ultra-premium Don Julio, he believed Diageo can regain its position in the Tequila category, lost in severing its relationship with Jose Cuervo.

The bald figures don’t look great but Menezes performance at the rostrum gets 10 out of 10.

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