Top 1000 2010: Company 2 - Diageo
Not plain sailing
Diageo has had trouble on the domestic front, but globally it has done well, with Guinness celebrating its 250th birthday this year.
Few global, not to mention Irish, brands can boast the longevity of Guinness. The "250 Celebration" for Guinness' milestone birthday on September 24th last may have been centred on St James’ Gate, the traditional home of the pint, but they became a global media event.
Diageo Newsfeed
April 25th: Diageo seen as possible buyer of C&C spirits portfolio
It is speculated that Diageo is one possible buyer of C&C's €200 million spirits and liquer arm, which it is believed is about to be put on the market.
March 25th Diageo plans to brew Guinness in South Africa
Guinness is to be brewed at Diageo's new joint venture brewery, south of Johannesburg. The brewery is a partnership between Diageo and Heineken and is an effort to muscle in on local brewer SABMiller's home turf. Diageo makes an estimated 10% of its profits in Africa, about 40% of which is from South Africa.
March 23rd: New black Guinness lager launched
Guinness Black Lager is launched on a trial basis in Northern Ireland. Aimed at a younger market, the decision to innovate raises comparisons with some failed experiments by the brand in the past.
February 12th: Diageo threatens to quit UK over tax
Diageo CEO Paul Walsh says the company would possibly reconsider moving its headquarters away from London if taxation on a corporate or individual level became more onerous. "We are a global company,” he said. “We enjoy being headquartered in London, but if the tax regime here in the UK became so egregious, either for corporates or individuals, we would have no option but to look at other alternatives."
February 11th: Alcohol industry hit by downturn but Guinness performs well
The economic weakness in Ireland and a reduction in customer spending continues to impact the alcohol industry, Diageo says, with Irish sales falling 10% in the first six months of its financial year. Sales of Guinness worldwide went up by 1%, reflecting a growing global market and a tougher domestic one.
It is 250 years since Arthur Guinness signed the 9,000 year lease on the St. James' Gate Brewery in Dublin with an annual rent of £45. While in the 1880s the St. James's Gate Brewery was the largest in the world, today it is still one of the largest stout producing breweries in the world and few drinks are as instantly recognisable as a pint of Guinness.
It is lucky for Diageo, the brand’s owner, that Guinness has such global appeal. The recession in Ireland has not helped Diageo’s performance in a country that has long taken its products to heart, not to mention manufactured many of them.
Diageo’s half year results in February saw a 10% fall in Irish sales over the last six months of 2010. The changed drinking climate in Ireland was highlighted by the fact that the “on trade" pub and restaurant sales were the hardest hit in the six months, falling 14%.
And there was disappointment too for Irish employees of the global drinks company when it was announced that a planned €650m investment in new brewing facilities had been put on hold until the economy recovers.
But thankfully for Diageo, Ireland is just a small part of its operation. Emerging markets have taken up the slack for the “pint of plain” and, globally, net sales of Guinness rose 1% in the half year. Other Diageo brands fared worse – there was a 4% decline in net sales of vodka brand Smirnoff and a 7% fall in net sales of Baileys.
Still, in that most recent period, Diageo posted a 3% rise in global net sales, to just over £5.2bn and a 6% fall in operating profits, to £1.5bn. This was led by impressive growth in South-East Asia where net sales grew 21%. Sales also rose 8% in North America but Europe lagged behind with 3% growth.
"We are in the early stages of recovery with more encouraging signs in the emerging and developing markets," said Diageo CEO Paul Walsh.
The company’s Irish staff will hope that this recovery becomes increasingly tangible. They, like their counterparts in the UK and elsewhere, have had to endure a restructuring programme aimed at cutting £100m from its cost base in the 2009-2010 financial year.
Like so many Irish based companies, Diageo was bitten by the property bug. Many saw its plan to consolidate a number of its Irish brewing operations in a €650m state-of-the-art brewery in Leixlip as at least partly motivated by the opportunity to make a killing on some land. The plan would have allowed the company to develop river front land at its city centre site in St James’ Gate.
Given its proximity to the city and a main transport hub, the site would have been a much more sensible development proposition than many of those that were built during the Celtic Tiger era. But, for now, it is not to be.
“In terms of Leixlip, the original project announced one year ago was to create a long-term internationally competitive brewing operation in Ireland and it made more sense to go down the path of bringing them together into one site than having them across a range of sites which is what we have today,” said John Kennedy, managing director of Diageo Ireland, last year about the decision.
“It wasn't about realising land value but was more about long-term strategy. We have put that project on hold for the next few months because we found that every assumption we made about the business back in May 2008 had changed dramatically by January 2009 so given this was the biggest single capital investment that Diageo plc has ever made it felt prudent to stop and re-check the assumptions on the work before moving forward."
