Diageo ‘over-exposed’ in Europe

With a 9% increase in interim dividends and 5% growth in organic net sales, Diageo’s half year results provoked few awkward questions from investors and journalists for CEO, Paul Walsh, when the figures were released today.

The biggest disappointment was Europe which had been expected to see some growth following positive comments from Andrew Morgan, President of Diageo Europe, six months ago.

As it was, double digit growth in Germany and the Benelux was not enough to ease the pain in Spain, and organic net sales were down 6% in Western Europe.

Diageo’s finance director, Deidre Mahlan, conceded that the company was over-exposed in the region, compared to its competitive set. Adding in Eastern Europe and Russia (up 15%), total Europe was adrift by 2%.

“Let’s not fool ourselves it’s tough,” said Walsh. “But in aggregate, I think the fact we’ve held our business flat is very credible to the team in Europe.”

Speaking of Scotch whisky, Walsh added that “if there’s a silver lining to the fact we’re not selling as much young stock in Spain and France, it means we can sell it as older stock into Latin America at much higher margins.”

Diageo’s Scotch brands grew 10%, led by Johnnie Walker (up 14%). For Diageo’s finance director, Deirdre Mahlan, Latin America was the most exciting market with sales up 16%, driven by Scotch brands like Buchanan’s whose volumes grew by over a third.

Meanwhile Walsh is confident that India will lower tariffs and open its market to Scotch, which is one reason why the company is about to build a new 13 million litre distillery in the Highlands.

Despite recent set-backs in its plans to own a majority stake in the giant Indian drink group – UBS, Diageo insist the deal will complete on time next month.

“We do not expect any issues as the regulatory process takes its course. There is no reason we see for a delay,” said Mahlan.

Paul Walsh refused to comment on the fate of Whyte & Mackay, following the take-over. There has been speculation that acquiring UBS’s Scotch whisky arm would either breach competition rules, or would not fit well with Diageo’s other whisky brands.

In terms of the overall portfolio, Walsh said that “generally there are not many gaps. Six years ago we were criticised for not having a premium vodka, but look at the growth in Ciroc and our acquired interest in Ketel One.”

There was no mention of seeking a new Tequila brand once the contract to distribute Jose Cuervo outside Mexico expires in June, or of buying a more mainstream Bourbon to add to the premium Bulleit brand whose sales have doubled in the USA to 300,000 cases.