Diageo in low spirits as falling sales hit profits

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The Independent Online

Diageo's ready-to-drink products, including its Smirnoff Ice brand, saw shrinking volumes in its key UK and US markets.

Reporting full-year results, the drinks giant yesterday put part of the blame for the poor UK performance on Chancellor Gordon Brown's decision to raise duty on products such as Smirnoff Ice, a vodka drink which comes ready-mixed.

Nick Rose, Diageo's finance director, said that he was sure that the duty change was a "strong contributory factor to the category going ex-growth in the UK."

He said that the 20p-a-bottle increase in duty had a "serious impact" on sales of ready-to-drink products in the UK and cost the company an extra £15m in duty.

These beverages were seen as high-growth but Diageo said unless it can develop new ready-to-drink products that showed the success seen with Smirnoff Ice in its early days, the category would just grow at the same pace as the rest of the group.

In the UK, ready-to-drink volumes slumped 6 per cent, while volumes were 17 per cent worse in the US, for the year ended 30 June. Overall the segment was 5 per cent up on growth in newer markets, such as Spain.

Mr Rose said: "We need another big success and we have not been able to pull that off yet. Unless we get another great innovation idea, we cannot expect growth of 20 or 30 per cent".

When it launched, in early 2001, Smirnoff Ice was a runaway success. Since then the company has failed in its attempts to produce other popular ready-mixed drinks, admitting last year that its rum offering, Captain Morgan Gold, was a failure.

In yesterday's figures, even Smirnoff Ice was shrinking in Diageo's two biggest markets, with volumes of Smirnoff-based ready-to-drink products down 11 per cent in North America and 3 per cent lower in the UK - where net sales (after duty) were 11 per cent down.

Matthew Jordan, analyst at ABN Amro, said: "RTD's [ready-to-drink] has probably had its big growth day. There are areas where it can grow a bit more but it is in decline in the US and reached a plateau in the UK".

For the group, underlying operating profit for the premium drinks business was up 7 per cent at £1.98bn. However, after disposals and exceptional items, pre-tax profit was £654m, compared with £2.34bn in 2002.

Mr Jordan said the figures overall were "disappointing" and showed Diageo having to absorb some of the increase in duties. Discounting was also evident in several products.

Sales of the group's Pimm's product were ahead by 45 per cent, thanks to the hot summer.

Nigel Popham, analyst at Teather & Greenwood, said: "Where are the levers of growth going to come from? The outlook is modest".

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