Blavod punished as margins slide

VODKA group Blavod Extreme Spirits drank deeply on strong interim sales growth, but saw its shares fall over yesterday as it admitted it was nursing a profit margin hangover.

Blavod announced that pre-tax losses were virtually unchanged at 1.68 million - against 1.62m last time - in the six months to the end of September. The group's shares spiralled down 15 per cent before eventually closing the session off 11.5 per cent, or 1.5p, at 13p.

Blavod said it had invested heavily in promotional activity as it pushed awareness of its main product, Blavod Black Vodka - but it was at the cost of group profit margins slumping from 34 per cent to 28 per cent.

The trading backdrop to the margin reduction was exacerbated by highly competitive conditions in the UK, it said.

In the US, Blavod's main market, margins fell to 26 per cent from 30 per cent in the year-earlier period, while margins in the UK, where the group's products are sold in most major supermarkets, dropped to 18 per cent from 24 per cent.

The promotional drive helped turnover increase 61 per cent to 3.5m (from 2.2m), while case shipments increased by more than a third.

Blavod's gross profits before marketing and administrative expenses jumped by a third to 986,000 from 737,000 in the same six months of 2005.

Jeff Hopmayer, chief executive, said: "We have continued to benefit from a strong marketplace, the continued rollout of our Tequila El Diamante del Cielo and the introduction of Cockspur Rum, which have accelerated our growth.

"Turnover in the UK and the United States has increased substantially. However, some of this growth has been at the cost of lower margins, specifically on Blavod Black Vodka, as we continue to support the brand."

Blavod said that it had taken action to reverse the margins decline in the second half of the trading year - including Christmas - "which is traditionally the main season for wine and spirit sales".

Hopmayer said he continued to believe there was potential for margin gains "on many of our brands".

As well as improved demand on both sides of the Atlantic, Blavod said its new tequila brand, launched as part of a joint venture with Japanese drinks giant Suntory, had been well received in the US. Case shipments increased in the US by 23 per cent and by 52 per cent in the UK and other markets.

Blavod was also boosted by distribution partnerships, including for the wines of the Domaines de Baron Rothschild and the recently added Cockspur Rum.

Total marketing costs fell 10 per cent, administration costs rising 24 per cent.

Hopmayer said: "The global market for wines and spirits continues to expand in the areas where we operate, while industry consolidation continues.

The group was formed through the 2003 merger of Blavod Black Vodka and Extreme Beverage Company.