Diageo reports stronger half-year profits

Diageo reported stronger half-year profits despite a 6% fall in the volume of Guinness sold in Europe over the period. Overall sales in Europe were down 3% in the six months to December 31, but Diageo said this was more than offset by strong growth in North America and in emerging markets as pre-tax profits rose 16% to £1.61bn.

Simon Litherland, Managing Director for Diageo Great Britain, commented,

“Great Britain remains a challenging consumer and economic environment, although we are seeing some signs of a fragile recovery. Across the country, the industry and our consumers continue to feel the effects of the duty escalator and VAT increase on alcohol beverages.

“Total beverage alcohol (TBA) value growth in the GB market overall was +4.3 percentage points; however, excluding the impacts of VAT and excise duty, value growth was broadly flat. Total beverage alcohol volume growth was down 1% overall, with spirits up 1%, beer down 1% and wine down 1.4%.

“In this context, Diageo Great Britain has delivered net sales growth of 1% in the first half, even following customer stock building ahead of the anticipated duty increase back in June. We achieved good results for our spirits brands in the off trade where Diageo spirits grew value share by +0.9 percentage points compared to the market which grew at 7%. In the on trade we gained volume share of +1.3 percentage points.

“During the first half, Diageo Great Britain marketing spend increased 3% in total and investment behind the Smirnoff trademark increased 4%, focused on activation of the “Nightlife Exchange Project” and support behind Smirnoff innovations, including Smirnoff and Cola pre-mix and Smirnoff flavours.

“For Diageo Great Britain, and our customers, innovation is a key growth driver in a competitive environment. The pre-mix cans segment was up 40% and is the fastest growing segment in the spirits sector.  The Diageo range maintained its leading position, growing share. Baileys flavours, driven by the launch of Baileys Hazelnut flavour, and Smirnoff flavours also had good sales growth, with Smirnoff flavours gaining 2 share points of the total vodka category and recently being awarded 2011 Product of the Year for Alcohol.

“Morgan’s Spiced grew net sales and share, benefiting from increased marketing spend. Net sales of Baileys grew 2%, with the new “Let’s do this again” campaign helping the brand to gain 2.9 percentage points of share.

“Our Reserve business, which sells our premium and super premium brands, showed robust performance. The highlight being innovative marketing executions of Tanqueray, including a sponsorship with the Goodwood Estate, which led to strong net sales growth for the brand.

“Our wines business delivered strong results with net sales growing 18%. A strong price/mix improvement was driven by price increases on Blossom Hill, the move out of lower value wine brand variants and sales of high value en primeur wines.

“In the increasingly competitive vodka category Smirnoff holds 51% value share, which is 1% down on the prior year. Overall net sales of Smirnoff were down 16% due to customer stock building ahead of the anticipated duty increase back in June, the continuing move from on trade to off trade and price conscious consumers buying more on promotion in the off trade.

“Although Guinness Surger increased brand distribution into a further 9,500 outlets, this failed to offset the continued, but slowing, contraction of the on trade with, on average, 29 outlets closing each week. The brand achieved 3 percentage points of price/mix driven by a price increase taken in last year and customer mix. Overall, Guinness net sales declined, partly due to consumers’ preference for lager during the 2010 Football World Cup.

“Diageo GB will continue to focus on building collaborative customer relationships in both the on and off trade as we expect the consumer environment to remain challenging. We will continue to invest in our brands to create sustainable and profitable growth for our customers and ourselves. We have some exciting consumer marketing campaigns coming up, including a new Summer campaign for Pimm’s, and are looking forward to the Six Nations rugby campaign, St Patrick’s day in March and the Royal Wedding in April.”

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