Diageo faces up to European challenge

Drinks giant Diageo today reported profits in line with market hopes but said the task of improving sales in Europe remained its biggest challenge.

Diageo said the introduction of a smoking ban in Ireland and a tax on alcopops in Germany weakened demand for many of its key brands, which include Guinness and Smirnoff vodka.

At the same time, consumers were opting to drink at home rather than in pubs and this had, for example, driven down net sales of Smirnoff Ice by 17% in the UK.

But the group said continued growth in North America, where four of its six spirits groups increased market share, and large markets such as Africa meant it was able to improve its overall trading performance.

Diageo unveiled pre-tax profits before one-off costs of £2.07bn (€3bn) for the year to June 30, which was down from £2.19bn (€3.2bn) last year. Adverse exchange rate movements reduced this year’s figure by £97m (€142.8m).

Operating profits were up 7% to £1.87bn (€2.75bn), which included £50m (€73.6m) of restructuring costs after the group outsourced IT operations to IBM, tackled difficulties in its Irish business and moved its Park Royal production operations in London to Dublin.

Chief executive Paul Walsh said: “We do not see any change in the trading environment that we face. Europe remains our key business challenge and North America continues to provide out biggest opportunity.”

Diageo trades in some 180 countries around the world and makes brands including, Guinness, Smirnoff, Johnnie Walker, Baileys, J&B, Cuervo, Captain Morgan, Tanqueray, and Beaulieu Vineyard and Sterling Vineyards wines.

In Ireland, turnover was €961m, up from €953m last year. Diageo put the increase down largely to the strength of the euro, which had a beneficial impact of €54.5m.

Operating profit before exceptional items was down from €192.9m to €185.5m. Guinness net sales declined 3% in Ireland, where the company emplys about 2,000 people.

In the UK, where Diageo employs 5,000 staff out of a global workforce of 24,000, turnover rose 2% to £1.41bn (€2bn) on higher sales of Gordon’s gin, Blossom Hill wine and Smirnoff Red.

But profitability suffered as younger people increasingly opted to drink at home rather than in pubs and bars.

Volumes of Smirnoff Ice fell 13% during the year, although it was able to capture market share as demand for alcopop brands declined at a faster rate.

Diageo saw its share of the ready-to-drink market in the UK fall by 0.3% following the decision to pull Gordon’s Edge from the shelves and the decline of Archers Aqua.

Sales of Guinness from off licences and stores in the UK rose 2% at a time when they declined by 5% in pubs, but cream liqueur Baileys increased volumes by 5%.