Guinness plans in doubt amid gloom

Published on Saturday 7 February 2009 13:13

DIAGEO chief executive Paul Walsh is expected to be quizzed this week on slipping sales as speculation grows that the drinks group is likely to shelve plans for a new Guinness brewery.

Analysts say the world's biggest spirits company, which also has Johnnie Walker and Smirnoff in its portfolio, is expected to report a modest slowdown as consumers trade down to more affordable brands, distributors reduce inventory levels, consumption shifts to the off-trade and the pricing environment becomes more difficult.

In May Diageo said it was planning to invest 568m to build a new state-of-the-art brewing plant on the outskirts of Dublin and to upgrade its historic St James's Gate brewery in Dublin where Guinness has been brewed since 1759. But in January it said it would conduct a "re-evaluation of its brewing investment programme".

But analysts now believe that the project may be scrapped altogether due to the collapse of the Irish economy and property market.

One analyst said: "The financial viability of the original plans was in Diageo selling off large parts of St James's Gate brewery to developers. With property prices now having collapsed in Ireland, this plan looks far less attractive.

"Also, with sales of Guinness being driven by overseas markets, any future investment is likely to be where demand is highest."

Meanwhile, the City will be looking for any clues that Walsh is close to agreeing an acquisition of up to 14.9% of Vijay Mallya's United Spirits Group.

Walsh, whose brands in India include J&B Rare and Smirnoff vodka, is understood to want improved access to the Indian spirits market.

A tie-up with Mallya's United Spirits, which lays claim to a 55% share of India's spirits market, would significantly help achieve this aim as the sector expands.

Diageo's net sales growth, which stood at 7% during the previous year, edged lower to 6% during the three months to September 30 and investors will be looking to assess the impact of the autumn's crisis.

Walsh, who said the firm was "alert to the impact" of the economic hangover, expects growth in underlying profits of between 7% and 9% during the current year, from 9% in the year to June 2008.

The strength and diversity of Diageo's business, particularly in faster-growing emerging markets, has helped insulate it in tougher times, but the rise in commodity costs may have taken its toll on margins.

Charles Stanley analyst Nic Clarke expects first-half pre-tax profits of 1.47bn, compared with 1.37bn the previous year.

He said: "The focus of attention at the results will be on the extent to which the business has slowed as the global economic downturn has gathered momentum."