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ALLIED DOMECQ - which has long lagged behind its bigger, and more diversified rival Diageo - is finally assembling a strategy to wring consistent profits out of its stable of spirit brands.

The world's second-largest spirits company said last week that it would focus on western Europe, Japan and North America while de-emphasising Latin America and eastern Europe. This, it said, would lead to improved sales of all brands, from Kahlua coffee liqueur to Beefeater gin. It also promised better profits.

Efforts to focus on selling these high-margin premium brands have been helped by the sale of Allied Domecq's low-margin pubs business to Punch Taverns for pounds 2.73bn. Shareholders approved the sale last week, thus giving the company time and money to focus on winning market share from Diageo, which was formed by the 1997 merger of Grand Metropolitan and Guinness.

Investors showed their confidence in the company by sending its shares up 11.5 pence, or 2.1 per cent, when sales and the shareholder vote were announced last Monday. For the week, the shares rose 19.5p, or 4.4 per cent.

So far this year, Allied Domecq shares have risen 3.0 per cent while Diageo shares have fallen by 6.4 per cent. The last time Allied Domecq shares beat Diageo for a full year was 1993.

Analysts, though, say Allied Domecq may find that gains will be hard to come by without a partner. "When you've got a company like Diageo that's two and a half times your size, can you really hope to compete in the long term?" asked Ian Shackleton, a Donaldson Lufkin & Jenrette analyst. "Hence the need for link-ups, alliances, joint ventures, maybe a merger."

Seagram of Canada, Pernod Ricard of France, Brown-Forman of the United States and the Puerto Rico-based Bacardi have all been tipped as likely contenders for an Allied partnership.