Business Analysis: Ireland's thirst for Guinness dries up

The slowdown in Europe is holding back the global drinks giant Diageo
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It sounds unthinkable, but it seems that the Irish thirst for Guinness is slowing, knocking the performance of the global drinks giant Diageo.

It sounds unthinkable, but it seems that the Irish thirst for Guinness is slowing, knocking the performance of the global drinks giant Diageo.

The company, which also owns Johnnie Walker whisky, Captain Morgan's rum, Smirnoff vodka, Bailey's liquor and Gordon's gin, yesterday said volumes of Guinness fell 6 per cent over the year in Ireland, and were down 5 per cent in Britain.

While sales in the United States, Spain and Africa are growing strongly, helping to lift annual group sales by 6 per cent and operating profits by 7 per cent, weak sales in Britain and Ireland are holding back further growth. Turnover and operating profits in Britain and in Ireland were broadly flat.

"The whole alcoholic beverage sector in Ireland is contracting," Paul Walsh, the chief executive of Diageo, said yesterday.

"Because Guinness is such a prominent part of that market, it will decline in line with that. The economy has been declining, tourism has been slow and the Government has taken a more hardened attitude to drinking, policing licensing laws more stringently."

He said the smoking ban in public places in Ireland was a contributing factor to the decline in alcohol consumption, but there was also a growing shift to off-trade, or retail, sales in Ireland and Britain.

This is putting pressure on margins, and Diageo is also struggling to persuade customers to buy Guinness from supermarkets.

"Guinness is a drink that people want to embrace and consumers don't automatically trade in to drinking in other ways," Mr Walsh said. Diageo was created in 1997 from a merger between the Guinness beer and spirits empire and Grand Metropolitan, which owned Smirnoff, Baileys brands as well as the Burger King fast-food chain.

Worldwide, Guinness volumes were up only 2 per cent, compared with growth of between 5 and 12 per cent for its other key brands, such as Smirnoff and Johnnie Walker.

In the US, Guinness volume growth was flat. But Mr Walsh yesterday rejected calls to sell off the Guinness brewing division to make Diageo a pure wine and spirits company.

Shares in Diageo closed 1.2 per cent down at 675.5p as investors were disappointed by the lack of growth in Diageo's figures. Mike Felton, a fund manager at Isis Asset Management, said the results were "lacklustre".

He said: "The company didn't sell as much to European consumers as expected."

Currency also had an impact on Diageo's results, with the weak dollar taking £97m off its profits for the year.

The US now accounts for 37 per cent of Diageo's operating profits, and saw strong growth in its premium brands. Captain Morgan's rum was the fastest growing, increasing volumes by 13 per cent.

The fall in sales of Guinness in the UK, however, has not stopped Diageo paying for an award-winning film director to work on a multi-million pound television advertisement for the drink. Anthony Minghella, who directed Cold Mountain, directed a £15m advert for Guinness which features a wild horse being tamed by a prisoner.

Drinks companies are coming under increasing pressure from governments across Europe to tackle binge and underage drinking.

France and Germany have become the latest countries to impose a swingeing tax on alcopops to try to cut down consumption. In the US, however, alcopops are proving popular.

The launch of Smirnoff Twisted led to a 7 per cent increase in volumes there.