Diageo signals warning of difficult trading ahead

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Related tags: Diageo, Stock market

Is Diageo, the spirits behemoth, losing its touch? The sprawling Johnnie Walker to Gordon's operation has hardly put a foot wrong in the past few...

Is Diageo, the spirits behemoth, losing its touch? The sprawling Johnnie Walker to Gordon's operation has hardly put a foot wrong in the past few years. Its achievements include out-manoeuvring, with a little help from French group Pernod Ricard, its rivals to capture Seagram, the Canadian group, and heading the ready-to-drink market with its Smirnoff Ice. Profits made impressive headway ­ up from £1.72bn to £2.34bn. And helped by buy-backs the shares turned in a resilient performance, surviving the stock market slump better than most. Indeed such was the Diageo magic that even when chief executive Paul Walsh pocketed a 30% pay increase to a staggering £2.3m there was hardly a murmur of discontent. But last week a hangover was evident. A cautious trading statement sent its shares spinning lower, although they subsequently staged something of a recovery. By all accounts, the yearly shareholders' meeting was a few bottles short of a celebration, as warnings emerged of "more difficult" trading conditions. Diageo's own targets were, rather ominously, said to be "looking increasingly challenging". To pile on the agony there are signs the RTD bubble may be about to burst. Diageo's latest offering, Captain Morgan Gold, has been such a flop that it is already walking the plank. The ill-fated Captain will cost the group around £42m. And the staying power of the US-style RTDs, such an important element in Diageo's growth, is now being questioned. On the spirits front problems are being encountered in Latin America and Spain. With the sale price of the Burger King fast-food chain likely to be scaled down and Diageo's notional pension fund deficit, reflecting the stock market crash, yawning wider to around £950m, the world's biggest drinks group is no longer its old imperious self. Its smaller rival Allied Domecq could be grateful it was slow to appreciate the RTD market. It recently launched two labels in the US, but they have not been instant hits. Still, the group's other operations have been flowing more merrily and it rolled out top-of-the-range profits of £480m, up from £453m. Allied, with a notional £335m pensions shortfall, was one of the losers in the Seagram auction. It slaked its thirst by swallowing a host of vineyards, becoming an influential force on the global grapevine. And more was poured into its leading spirit brands such as Beefeater gin and Ballentine's Scotch whisky. Both Allied and Diageo have grown out of old-style brewing businesses. Indeed, Allied was once the nation's biggest brewer; Diageo's heritage includes Watney Mann. The two have fast-food interests but whereas Diageo is hoping to sell Burger King, Allied seems at the moment quite content with its US food side. Still, I would not be surprised if Allied decided to concentrate on wines and spirits and sell its largely US-based food division. After all, to obtain its present shape it has unloaded a host of businesses, including its pubs estate, breweries, British wines, cider mills, garages, hotels, off-licences and the C&C Irish operation. Diageo ­ once it off-loads Burger King ­ will be a "pure" drinks show. But I wonder if Guinness has a long-term future in the group. Like Allied, I feel Diageo will eventually concentrate on wines and spirits, with the beer side either sold or floated.

Related topics: Spirits & Cocktails

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