Famous Grouse hit by flat sales:The Investment Column

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The Independent Online
Highland Distilleries, maker of The Famous Grouse, was cast in the role of wicked corporate predator earlier in the summer when it forced through the takeover of Macallan, but in reality it is more sinned against than sinning, dependent for most of its profits on one product, The Famous Grouse, whose future is determined as much by the marketing budgets for Guinness's Bell's and its peers as its own efforts.

Full-year figures for the 12 months to August were distorted by the one- off costs of the Macallan deal - peering behind the reported 14 per cent fall in pre-tax profits from pounds 42.9m to pounds 37.1m, the underlying picture is rather more prosaic with a 2 per cent rise in turnover to pounds 184.8m resulting in pre-interest profits that were flat at pounds 36.5m.

With the bulk of Grouse sales still made in the UK, Highland was hit hard by a 4 per cent decline in the overall Scotch market, even if it slightly outperformed the rest of the industry and gained a bit of share. Europe and America did well but they are relatively small in group terms and Highland has an insignificant share of the interesting Asian markets.

The susceptibility of Grouse to initiatives from Bell's was underlined by a 7 per cent fall in volumes in the on-trade compared to a 2 per cent rise for Bell's, which has targeted the pub market. In the off-licences, by contrast, Grouse held its own while Bell's declined by 11 per cent.

Those figures underscore the difficulties inherent in the spirits business - flat world demand, small price rises if any and the need to spend heavily just to maintain brand awareness and market share. Guinness and Grand Met are at least now singing from the same hymn sheet as regards phasing out discounts to pay for greater marketing, which will help Highland's determination to hold the line on prices, but it will be a long haul.

On the basis of forecast profits of about pounds 42m and earnings per share of 21p, the shares trade on a prospective price/earnings ratio of 16 after yesterday's 9p fall to 330p. The shares have been in a slow relative decline for three or four years now and it is difficult to see how they will reverse the trend. High enough.