Burger King demerger off menu as profits slide 12%

Diageo, the world's biggest drinks group, will not be able to separate its Burger King division before the end of next year at the earliest because of poor burger sales and a slump in operating profits at the fast-food chain.

Paul Walsh, Diageo's chief executive, admitted a 12 per cent fall in Burger King's annual operating profits to £177m was "disappointing". He said the group was making "significant progress" towards improving Burger King's performance under a new team, led by John Dasburg.

"The key aim is to increase revenue per store," Mr Walsh said. A drop in new restaurant openings in the US and the effects of foot-and-mouth in Europe has hit sales. New products are expected to help drive an increase in sales but not until the second half of the fiscal year. Burger King owns nearly a quarter of US burger stores but gets only 18 per cent of the overall revenue.

Diageo is expected to reveal how it will separate Burger King before December. Mr Walsh said: "We will consider all options but our first priority was to formulate plans for the turnaround of the business." He added that Burger King only contributed 6 per cent of Diageo's profits.

Diageo also faces more delay to the sale of its Pillsbury baked goods business to General Mills. US regulators are not expected to end a review before October, further frustrating Diageo's plans to exit food to concentrate on "power" brands such as Smirnoff and Guinness.

The group reported a 19 per cent rise in pre-tax profit for the year to 30 June to £1.72bn against £1.45bn a year earlier, on sales up to £12.8bn from £11.9bn. Before exceptionals and goodwill, related to integration and restructuring costs, profits rose 9 per cent to £1.98bn.

Full-year sales of Diageo's eight leading brands, which comprise 55 per cent of the total, rose 15 per cent. This was boosted by a 10 per cent rise in marketing spending. Nick Rose, the finance director, singled Smirnoff out as a star performer. Sales of the vodka surged 52 per cent. Mr Walsh denied claims its 15 ready-to-drink products, including the recently launched Archers Aqua, risked cannibalising sales of its leading brands. "I think innovation can drive significant growth by broadening the areas we compete in and reaching new consumers," he said, adding that a strong parent brand was crucial to success.

Diageo is also waiting for US approval for its joint £5.6bn purchase of the Seagram's drinks business with Pernod Ricard. The French group said last month it expected clearance of the deal in September. Diageo's shares slipped 3p to 701.5p.

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