Diageo hit by downturn as drinkers cut back on firm's luxury brands

Published on Thursday 11 February 2010 20:36

SCOTLAND's biggest distiller has revealed that drinkers cutting back on luxury brands in the downturn had hit its half-year profits, but that the UK had outperformed tougher markets.

Diageo's latest figures came as chief executive Paul Walsh said the multinational would keep its options open about possibly moving its tax HQ out of the UK if there were continued "egregious" rises in personal and corporate levies.

Walsh, who unveiled a 3 per cent drop in underlying operating profits to 1.63 billion in the six months to June, said the group liked the UK and there were no plans to move. He added: "However, it's a competitive world. If we continue to see tax increases at a corporate and individual level we will look at other options. Government should not take us or any other multinational for granted."

There have been recent unconfirmed reports that Diageo was privately offered a relocation package by the Swiss authorities but had turned it down.

On the latest results, Walsh said the UK had outperformed difficult markets such as Spain and Ireland, where there were net sales falls, mainly in the on-trade.

Diageo's marketing drive to celebrate the 250th birthday of Guinness saw the brand gain market share in Britain and Ireland.

A promotional push on spirits and Blossom Hill wine over Christmas also contributed to a 6 per cent volume rise and a 5 per cent sales jump in Britain with "share gains delivered across spirits, beer and wine".

This contrasted with a 2 per cent fall in group underlying sales to 5.2bn during the first half, but Diageo said growth resumed in the second quarter.

Walsh said he did not expect the general trading down phenomenon to abate before consumer confidence returned.

He has previously said a key appeal of the group is to provide "a little affordable luxury". But yesterday he said: "The situation has changed. Consumers do not have as much disposable income or the confidence. They are a little leery of what the future offers. They are not going out or are not prepared to spend at the rate they were spending."

Walsh said consumers still wanted Diageo's brands, which include Johnnie Walker whisky, Smirnoff vodka and Gordon's gin, but "don't have the wherewithal to experience them with the frequency they are used to".

He reiterated that Diageo opposed the Scottish Government's idea of minimum pricing of alcohol to help cure some of society's drink-related problems. "I have a philosophical view that governments have enough to focus on. I'm not sure they should be tinkering about with this," he said.

The firm, which raised its interim dividend 5 per cent to 14.6p, kept its guidance for low single-digit underlying operating profit growth for the full financial year.

Walsh said he saw the early stages of a recovery with encouraging signs in emerging markets such as Latin America, Asia and Africa helping to drive underlying sales up 2 per cent in the quarter to December following a 6 per cent fall in the previous quarter.