Menezes relaxed as Diageo splutters

on 29 January, 2015

Drinks International's editor Christian Davis was at Diageo's half-year results briefing.

Diageo changed format from its usual sanitised, slick presentation delivered from a podium to gathering around a large dining table in one of London’s best known restaurants (Quaglino’s) in St James’s around the corner from Diageo’s London office.

Instead of chief executive Ivan Menezes going through all of the results with various directors chipping in, Menezes plumped for something far more informal with a brief overview and then throwing the meeting open to questions. It was reminiscent of Pernod Ricard’s breakfast briefings after they have delivered their top line results.

Despite hardly impressive results with volumes down 1.9% and organic net sales down 0.1% for the six months to December 31, 2014, the Diageo chief was extremely upbeat - as you would expect when it comes to shareholder expectations.

He spoke about overall improvement in economies, the developed world being “solid and stable” and most importantly an interim dividend up 9% to 21.5p a share.

A great deal of blame was heaped on fluctuating foreign interest results with the Venezuelan bolivar, Russian rouble and the euro being singled out for opprobrium.

Arguably the star performer was Africa with organic net sales up 5% and volume up 9%. Smirnoff and Johnnie Walker turned in stunning performances in South Africa with overall volume up 21 and 19% respectively.

He was keen to emphasise that Africa is big and full of potential - “economic growth projections and the demographics are very good with an emerging middle class and urbanisation” - and Diageo is big on the continent having had a Guinness brewery in Nigeria since 1964. With illicit alcohol representing “more than half” of consumption in many African markets, the potential in many countries is regarded as huge.

Things were not so good for the world’s number one premium vodka in Diageo number’s one market, the US (32% of total). Smirnoff and Captain Morgan were down 5 and 7% in volume with Walker and Baileys also down 4% each. It certainly would appear the drinks giant got its pricing strategies wrong in the US as far as Smirnoff and Morgan were concerned. Menezes was reluctant to admit that by raising prices and trying to maintain margins while competition intensified and prices came under pressure, the brands had suffered.

Summoning all his best finessing he stated that Smirnoff would become more competitive but would not be “rolling back, no price cuts”. Under intense questioning Menezes spoke vaguely of “moderating and slowing down (prices) while promoting Smirnoff more”.

He put Johnnie Walker’s poor performance in the US down to “shipment phasing” of the Platinum and Gold Reserve expressions. “We have shipped a lot of whisky last year,” he said. So basically, there is a lot of Johnnie Walker in the US at the moment that needs selling.

Regarding India and United Spirits, Menezes said Johnnie Walker was 50% up as USL and Diageo brands are integrated into one portfolio. In answer to sceptical journalists’ questions, Menezes was adamant that Diageo had not only completed taking control of the company but was now in complete control despite some boardroom comings and goings.

On vodka and flavoured spirits, Menezes said Ciroc Pineapple and Crown Royal Regal Apple in the US had done well and J&B Honey had done well in France and Spain. But he said he and the company remained “very cautious” about flavouring whisky. He said Canadian whisky brand Crown Royal had an “accessible” image so the flavoured variant ”sits naturally” with it.

John Kennedy, Diageo’s American president of Europe chipped in that J&B has a strapline of ‘the whisky that breaks the rules’ and the flavour variant had given the brand “energy”.

Regarding the recent news that Diageo wishes to switch its suppliers to payment in 90 days rather than 60, Menezes said: “We are not going to force suppliers but we want to sit down with our suppliers and discuss the overall package. We will work with our suppliers to get the right package.

“We have to optimise the supply chain and improve forecasting benefits to the supply chain. We have to be joined at the hip to our suppliers. We have to have relationships that are sustainable,” said Menezes.

He emphasised the importance of innovation, citing the success of the ultra premium, French vodka, Ciroc (particularly the Pineapple variant), the ‘David Beckham’ blended grain whisky, Haig Club and the new Guinness beers - Blonde American Lager, Dublin Porter and West Indies Porter, which are latching onto the craft beer movement.

So results: five-out-of-10.  Briefing Performance: 7/8-out-of 10. Diageo going chummy and informal is a game changer, if nothing else. One wonders how Pernod might respond.

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