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Fizz goes out of Diageo’s sales
14 February 2010 By Samantha McCaughren, Business Correspondent
Consumers are slow to give up alcohol during a recession, but drinks giant Diageo is finding that cheaper alternatives are more appealing in tough times. The company disappointed the market with its half-year results last week, with some analysts now questioning whether or not it can ever return to the growth levels enjoyed over the past decade.
For the past number of years, the buzzword for Paul Walsh, chief executive of Diageo, has been ‘‘premiumisation’’. This is all about customers trading up to more expensive versions of brands, with research showing the consumers tend to desire more costly products.
Over the past few years, Diageo, which owns Guinness and Baileys, developed new variants such as the Johnnie Walker Blue Label to fulfil the needs of consumers ‘‘seeking luxury-drinking experiences’’.
However, with consumers now more focused on value, Diageo is under pressure. Organic net sales were down 2 per cent to stg£5.2 billion.
Walsh conceded that ‘‘the performance of our standard priced brands has been stronger than that of our premium priced brands’’, flying in the face of the premiumisation strategy.
There are other challenges for the group. Diageo and other drinks companies face a marketing challenge in the current environment.
Drinks companies have become one of the biggest spenders on advertising in Ireland and elsewhere, and are now tied to that high expenditure.
A drop-off in marketing spend leaves them at risk of losing market share.
Heavy advertising is not enough to convince people to drink luxury spirits, however.
NCB Stockbrokers noted that the sales of basic versions of Diageo brands rose at the expense of premium products, in spite of an increased ‘‘share of voice’’, which is the slice of advertising coverage that the portfolio managed to get.
London broker Redburn welcomed the fact that Diageo did not slash advertising spending, but pointed out that this was ‘‘also reflective of the ongoing investment required in the industry, which again will limit the margin growth over the next couple of years’’.
Diageo reported that, in the US, consumer confidence continued to be weak, with sales down 6 per cent due in part to a disappointing Thanksgiving.
International sales, which included Africa, were up 8 per cent.
Beer grew strongly in Africa, with Harp’s performance in Nigeria among the highlights.
In Asia-Pacific, sales were down 1 per cent. In Europe, sales were down 5 per cent. The key Irish and Spanish markets were troubling for the group, with little sign of recovery here for some time.
In Ireland, the spirits market was down 12.6 per cent and beer was down 10 per cent. Diageo’s Irish figures revealed a 10 per cent fall in overall sales.
The shift to drinking at home is continuing, and the company is continuing to tailor its products to meet this need by offering more off-trade product and smaller retail packs. Sales in pubs are down 14 per cent.
The lager brands distributed by Diageo in Ireland, Budweiser and Carlsberg, declined broadly in line with the total market, while both Smithwick’s and Harp grew share due to a new brand positioning strategy for Smithwick’s and the launch of Harp Ice Cold. Ironically, Diageo’s long running problem of sliding Guinness sales in Ireland and Britain seems to have been tackled.
For a number of years, Guinness was losing share of the market to rival beers, as a new generation of drinkers failed to adopt the stout. The first half results said that ‘‘Guinness remained resilient and delivered share gains in both Britain and Ireland’’.
The international success of Arthur’s Day has been well-reported, and Diageo said that, during these uncertain times the heritage of Guinness was a considerable asset.
Baileys, on the other hand, saw its phenomenal growth story hit by consumer aversion to conspicuous spending at present.
‘‘The global economic recession continued to impact the brand significantly, as consumers viewed liqueurs as a luxury purchase," the company said. ‘‘By market, the primary drivers of the net sales decline were North America - where the category has been one of the most impacted - eastern Europe and Russia." Organic net sales for Baileys were down 2 per cent, although volumes were unchanged.
Diageo said the move to beer was in keeping with the shift to value by consumers. Redburn said that the results reinforced its ‘‘conviction that the beer industry remains much better positioned for growth this year and into next’’.
NCB and Davy stockbrokers said that Diageo was well-placed to make the most of economic recovery.
‘‘After significantly underperforming the sector and the market in 2009, we expect the stock to outperform this year," said NCB’s Paul Meade.
However, Redburn was more cautious, saying ‘‘that Diageo will emerge from the crisis a lower growth business than it entered’’.
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