Weak dollar sees huge fall-off in Diageo profits

DIAGEO spent close to €75 million closing its Guinness brewery in London and shifting capacity to St James Gate in Dublin, it emerged last night.

The company also said the weak US dollar will shave close to €150m off the profits of the drinks giant which makes Guinness, Baileys and Smirnoff.

Currency impacts in the first six months of the year will wipe out profits from an increase in sales, the company warned yesterday in a trading update which resulted in a near 2% dip in the company's share price.

The dollar's decline against sterling and other currencies, as well as costs to close plants, eroded profit even as Diageo, like smaller rivals Allied Domecq Plc, benefited from a consumer switch in the USA from beer toward cocktails, scotch and wine.

Diageo stock has declined 3.8% this year, making it the worst performer in the nine-member Bloomberg Europe Beverages Index. The index has gained 11% during the period.

Diageo disclosed that sales and volumes in the year just ended would show similar rises to those in its first-half of 6% and 3% respectively, while annual underlying operating profits were expected to grow by 6%.

However, Bailey's and Cuervo tequila liqueur group added that sales, volumes and profit rises were expected to be similar for the year just started, while many analysts had pencilled in higher growth.

Diageo said it would now account for its General Mills stake as an investment rather than an associate as it waits for the official go-ahead to sell its stake which was a legacy of Diageo's deal to sell Pillsbury to General Mills in 2001.

Diageo said it expects the same effect from exchange rates for the current fiscal year, mostly because of the dollar's decline against the pound and currencies such as Nigeria's naira and the Venezuelan bolivar.

Diageo is driving growth in the US by advertising Smirnoff as having no carbohydrates in magazines like Cosmopolitan in an effort to benefit from the trend for low-carbohydrate diets, such as that made famous by the late Dr Aktins.

As much as 11% of America's adult population may follow low-carbohydrate diets, an Opinion Dynamics poll has showed.

Additional reporting: Bloomberg and Reuters.