Johnnie Walker keeps Diageo flag flying
Patience Gould looks at the first half results released this month for Diageo and Pernod Ricard. Although the French multinational has won the first round, Diageo has money to spend
THE TWO industry giants, namely Diageo and Pernod Ricard, have revealed their first half financial results – 1 July to 31 December – and they make for fascinating reading. Overall both firms advanced, though Diageo’s growth fell short of City expectations, while Pernod Ricard is all set for “improvement in its 2010/11 full year guidance”. Diageo posted a 2% growth in operating profit compared to Pernod’s 8%, that is respectively £1.727 billion against €1.21 billion, based on net sales of £5.32bn and €4.282bn.
“This strong performance enables us to revise upwards our guidance for organic growth in profit from recurring operations to a level close to 7% over the full 2010/11 financial year,” said Pernod Ricard’s chief executive officer Pierre Pringuet. “We will pursue our policy of sustained investment in our strategic brands and markets.”
Over in the Diageo camp, chief executive Paul Walsh said: “Momentum is building in our business…Despite the economic weakness in much of Europe, our first half performance gives me increased confidence that we will improve on the organic operating profit growth we delivered in fiscal 2010.”
Well, as they say, “we wait and see”, but Europe was not an easy stamping ground for either party. For Diageo volume in Europe was down 2%, net sales by 3% and operating profit by 9% and the decline was attributed to economic pressures in Greece, Iberia and to a “lesser extent” Ireland.
Pernod by contrast posted a 2% sales gain across the region aided and abetted by France, up by 5%, and “strong growth” in Central and Eastern Europe. North America is of course Diageo’s prime stronghold and volume was ahead by 2%, net sales up by 3% and operating profit by 5% – it’s quite difficult to compare the two here as Pernod puts the US in its Americas, which also includes South America. However the French multinational remarked that there “was a return to growth in the US” and across the region growth was in the order of 15%, and that despite “the sharp decline in Venezuela”.
And now for the really good news – Asia was the star performer in both sets of results. Heartening for Diageo, as although overall growth for Asia Pacific was 7%, in the emerging markets – led by India, Thailand, Malaysia and Vietnam – net sales grew by 15%, with Korea up 9%. Pernod’s engine in the region is certainly China and the company had an “outstanding performance” across Asia/Rest of World with 23% organic growth.
While Johnnie Walker, Windsor and The Singleton were the stars of Diageo’s Asian show, for Pernod it was Martell. Indeed the Cognac had a stonking first half overall with organic growth up 32%, just pipping the company’s ultra premium Scotch Royal Salute, which posted a 31% gain across the board. An impressive eight of Pernod’s 14 priority brands posted double digit gains, including Ballantine’s up 13%, Chivas Regal up 11% and Havana Club up 10%.
Johnnie Walker is Diageo’s redoubtable foot soldier and for the six months it turned in a 10% increase in organic net sales. As such it contributed more than a third of Diageo’s net sales growth, with the “fastest” growth coming from the super deluxe variants, Blue Label leading the charge. Interestingly it was the International regional division, which incorporates Latin America, Africa – notably South Africa where Scotch drove net sales growth of 10% – which was the main engine for Johnnie Walker. Volume was down in North America, though depletions were up in a “broadly flat” Scotch category, but there was strong growth in Russia and Eastern Europe.
There were mixed fortunes for J&B, another of Diageo’s strategic brands, which with its heartland in Spain suffered from consumers trading down to lower priced Scotch whiskies – and even an 8% increase in net sales in France, its second largest export market, was not enough to keep the brand in positive mode: organic net sales fell by 10% over the six month period.
On the vodka front it was a frustrating time for Diageo’s world number one Smirnoff. There was “strong growth in International”, but the “intensely competitive” nature of the category in Europe led to “negative price/mix” and net sales down 1%.
Over in the US Smirnoff lost share as “the reduction in the level of off-trade price promotion increased its relative price” and in Europe the prevailing economic difficulties in Spain and Greece, together with “lower volume and negative channel mix in Great Britain” did not help matters.
By contrast over in the Pernod Ricard camp, its flagship and premium vodka Absolut posted a 7% increase for the period which confirmed “the recovery initiated in the second half of 2009/2010 in the US” and the brand continued to grow “strongly” notably in Germany, Poland, Brazil, Canada, France, the UK and Eastern Europe.
Both companies upped their marketing spend, Diageo by 10% and Pernod by 11%. “We have increased marketing spend significantly – but in a very focused way,” said Walsh. “Thirty-five per cent of the increase was behind strategic brands in the US to build the brand equity as we move away from promotional support, and over 60% of the increase was on our brands in the faster growing emerging markets.”
And Pringuet commented: “Advertising and promotion expenditure grew significantly, reflecting the Group’s intent to develop its strategic brands over the long term. The Group intends to continue its sustained investment policy.”
Clearly Pernod Ricard had the better of things over the first half of its trading year, and the fact that the company has its own Cognac, Martell, is proving a boon particularly in China. Indeed the results have prompted some industry discussion about the centralised (Diageo) versus decentralised (Pernod Ricard) structures of the two multinationals. Pernod’s decentralised approach allows the company to be far more brand-centric and it was interesting to hear an industry observer comment that Diageo has a far more FMCGbased approach to the industry.
It’s almost as if one has the tender loving care while the other does not. But there’s another six months to go and Diageo is in acquisition mode. It’s very much in the running for the business of Beam Global, of Jim Beam Bourbon fame, which is now up for sale; has just acquired the big Turkish player Mey Içki; and prior to this has formed a strategic partnership with Vietnam’s leading contender, the Hanoi Liquor Joint Stock Company. It all bodes well for the future.
By contrast though, Pernod Ricard is still reducing its debt, which amounted to €9,720 million, down by €864 million by December end – but “rapid debt reduction” remains a clear priority for the coming six months. SB
