Diageo to lift earnings despite tough US and European markets

Published on Wednesday 18 August 2010 16:41

TOUGH markets in North America and Europe have failed to dent Diageo's profits progress, the world's biggest spirits group is expected to reveal this week alongside news as to whether it has beefed up a marketing budget that was slashed in the recession.

Fragile consumer sentiment in the US and Canada, from where Diageo gets 35 per cent of its group sales, is thought to have led to drinkers trading down to less expensive drinks, although the group is expected to have made forex gains from the stronger US dollar.

Carl Short, drinks analyst at Standard & Poor's Equity Research, said the company would not be immune to recent evidence from other companies in the fast-moving consumer goods sector, such as Unilever and Reckitt Benckiser, "that western Europe is a difficult area". Diageo gets about 25 per cent of its sales in that region.

Short said: "The immediate concern is western Europe but there is also a worry that North America is not recovering as fast as was hoped four or five months ago. Will there be a double-dip recession and what would the effect on food and drinks consumers be? In both the US and Europe, people have started trading down. This could go on for years before consumers in those regions feel comfortable."

Diageo's upmarket spirits drinks include Johnnie Walker whisky, Smirnoff vodka and Captain Morgan rum. However, Short said he believed the group will have offset those difficult markets with a better performance in Asia Pacific and Latin America when it posts annual results on Thursday.

He expects Diageo chief executive Paul Walsh to report profits of 2.25 billion, up from 1.99bn, and the total dividend to rise to 38p from 36.1p.

Diageo slashed its advertising and promotion budget by 9 per cent to 14.3 per cent of sales in the year to end of June 2009. One analyst said: "It will be a gesture of confidence if that budget has been increased as we have moved out of recession."