Diageo Blames Consumer Environment for Net Sales Drop

FILED OCTOBER 1, 2009

Dear Client:

The big story today is that Diageo’s organic net sales dropped -6% in the three months ended September 30. This dip was reportedly more than what some analysts expected but chief Paul Walsh pointed to the tough consumer environment: “As we anticipated consumer trends across our markets remain broadly unchanged since the year-end,” he said in a statement. As a result, net sales declined considerably from the same period in 2008 when Diageo was doing quite well. Diageo shares declined as much as -4.7% in midmorning trading in London.

Is this a representation of the state of the spirits industry, or does it highlight the impacts of distributor inventory reductions? We saw several reports taking either side but believe it was a combination of the two. Note that in the same period in 2008, Diageo’s distributors took an inventory increase in the US (remember those days?) of about 1 million cases ahead of a planned price increase. Fast forward a year later, and they were scaling back dramatically.

Says Paul: “In the first quarter of last year stock levels increased. However this year, stock levels have not risen in the first quarter and in our biggest market, North America, stock levels in our US spirits distributor channel are below those held at 30 June 2009.”

For the sake of argument we took a look at IRI data in the 12 weeks to September 6 to get a feel for the entire US spirits business. Spirits grew 0.7% in dollar sales while volume grew only 0.4%. Spirits brands priced $17 and below posted growth, with super-premium and ultra-premium spirits taking a hit. Popov is certainly benefiting from this trend, while other brands that have traditionally gotten more attention are not.

Diageo also reiterated its guidance for low-single digit organic growth in fiscal 2010. Its restructuring program “is on track” to help reduce costs by £120 million. They also “continued to benefit from efficiencies in marketing spend and media rate deflation.” Many in the industry believe wine and spirits sales will gain closer to the holidays, so perhaps Diageo is anticipating that as well.

UBS analyst Melissa Earlam acknowledged in a note to investors that “this was Diageo’s toughest quarter in terms of year over year comparables.” Luckily, Diageo “does not expect net de-stocking in the US for the full year.”

FOSTER’S DEFENDS CHARDONNAYS’ HONOR

Foster’s Group hopes to restore Australian chardonnay’s reputation to consumers by reinvigorating the category. A new article in The Australian says Foster’s held a round table summit for wine critics, producers and retailers this week to discuss methods of improving chardonnay's image, which has lost some steam to sauvignon blanc in recent years. It quotes Foster’s Australian wine manager David Dearie as saying: “These are great wines and we need to get them to the consumer." Summit attendees tasted and analyzed 30 different chardonnays looking for inspiration. They considered such ideas as introducing a “sweetness scale” for wine labels and marketing aimed at wine waiters.

WINE CONSUMPTION RISING AT A NEW LOW, SAYS IMPACT

The issue of consumption hasn’t been as big of a concern as trading down in the past year although the two phenomenons tend to go hand in hand. Americans love wine, it’s true, but are gravitating towards less expensive, big brands instead of high-end, niche producers in 2009. They’ve also considerably cut consumption on-premise.

A new report from Impact says wine consumption is expected to grow 0.6% this year which is less than in years past. In fact, consumption grew 1.5% in 2008 which was then considered a new low from 2001.

The top 28 brands in 2008 that sold at least 2 million cases each in the US grew a collective 1.1% in volume but were also priced 35% below the industry average, the report found. The trend has continued into 2009. Another causality of the recession is imports, as we know, because they are typically more expensive than domestics (depending on where they come from). Growth of domestic last year outpaced imports for the first time in 13 years, according to Impact Databank. Luckily, wine industry growth is “expected to gradually build momentum” as the economy improves.

NEW APPOINTMENTS AT DIAGEO NORTH AMERICA

In other Diageo news, the company appointed Maggie Lapcewich to the role of president of global tequila, effective Nov 15. She will be the single point of leadership accountability for Diageo’s global tequila business encompassing Cuervo and Don Julio. Maggie will continue to serve on the North America executive team, reporting to US president Larry Schwartz, while also working closely with the other regional presidents.

With this change, Mark Hubler, currently president of control states, will expand his role to president, control states & national accounts. Mark will also join the North America executive team.

Mark will report to Kevin O'Neil, who is appointed president, U.S. spirits, national accounts & sales development.

WSD BRIEF:

THE BECKMAN FAMILY, MAKERS OF JOSE CUERVO, is expected to purchase a 310,540 square foot building in Chicago at 303 W. Madison St. for approximately $60 million, according to a local real estate publication.


Until tomorrow, Megan

“If all economists were laid end to end, they would not reach a conclusion.”
George Bernard Shaw

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