Diageo suffering from downturn in global exports - Whisky producing giant hit by write-offs and poor sales

www.sundayherald.com By John Phelps

DIAGEO, Scotland's biggest whisky producer, is set to disclose a sharp drop in business in major export markets when chief executive Paul Walsh rolls out its latest figures on Thursday.

'Apart from the USA, Diageo can normally take comfort from the fact that it has about 14 other markets each capable of producing profits of more than £15 million,' said analyst Nigel Popham at Teather & Greenwood. 'That won't be the case this time round.

'The situation in Latin American has deteriorated -- sales in Venezuela will be dire -- while I am also expecting poor news on Spain and to a lesser extent on France and Japan.'

He is also braced for news of a significant downturn in the £100m-plus Taiwanese market after a spectacular own-goal when the company's advertising agency J Walter Thompson briefly ran an 'amusing' advert questioning the quality of Taiwanese goods.

Diageo employs 4000 people in Scotland where its 29 company-owned distilleries produce top-selling brands such as Johnnie Walker, Bell's, and Smirnoff. They are overseen by Allan Burns, Diageo Scotland director, who in December culminated a £25m investment programme with the opening of the world's fastest whisky bottling line in Shieldhall, Glasgow.

But more than 85% of Scotch whisky production is sent overseas and the current downturn in exports is likely to be shared by others in the industry.

The Scotch Whisky Association is still compiling its 2002 figures but said it expected to see a downturn on the £2.3 billion export sales achieved the previous year.

'We still hope to see sales above £2bn for the 10th successive year,' said a spokesman.

However, there are fears that this is unlikely unless the global economy improves. Diageo shares were testing new lows ahead of Thursday's announcement and slipped to 572p last week, down from 940.5p in the past year.

Analysts say the results will be clouded by a number of special factors following last year's acquisition of the Seagram business, which means that Diageo now owns 18 of the world's top 100 selling drinks brands which also include Captain Morgan, Guinness, Baileys and Tanqueray.

These exceptional items include a possible write-off of as much as £1bn following the disappointing price obtained for Burger King last December and analysts expect the company to also confirm its pension funds were in actuarial deficit to the tune of another £1bn at the end of last year.

But on a straight-trading basis analysts expect the group to announce half-year profits of around £1.25bn and have pencilled in an increase in full- year figures from £2.04bn to around £2.2bn following the Seagram acquisition.

These forecasts are dependent on no further deterioration in the global economy as a result of the Middle East situation and the relative stability in foreign exchange markets -- Diageo 'hedges' its exposure to the US dollar and other important currencies but it is understood that a number of these protective contracts come up for renewal in the summer.

Analysts will also be scrutinising the performance of the group's range of ready-to-drink products among signs that Smirnoff Ice has been feeling the heat of increasing competition from newcomers and adverse publicity in the USA.

RTDs are now an important aspect of Diageo's portfolio with sales jumping from £470m to £814m during the year to the end of last June but the company warned in October that growth had slowed.

The situation has been complicated in the USA where the group has avoided higher taxes by using a malt base for its RTDs rather than spirits.

This has led regulators to carry out a review to see whether consumers are being misled by the branding of Smirnoff Ice in the USA, where it contains no vodka .

Diageo insists it is relaxed because the alcohol content is the same as stated on the label, even though regulators could insist on changes that would lead to a relaunch or higher prices. Diageo had to withdraw its rum-flavouredCaptain Morgan Gold after poor sales, resulting in a £42m write-off.

The company last week undertook to market its products responsibly in meetings with the World Health Organisation in Geneva. Walsh said: 'We are proud of our brands. We want Diageo's promotional activities to be recognised as the best in the world. That means delivering great results for our brands in a way that sets the industry standards for responsible marketing.'

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