Smirnoff distiller Diageo faces £200M+ restructuring hit

By Rod Addy

- Last updated on GMT

Good summer weather almost trebled sales of Pimm's in Great Britain in 2013
Good summer weather almost trebled sales of Pimm's in Great Britain in 2013

Related tags Diageo

Diageo faces restructuring costs of up to £250M in order to deliver annual savings of £200M by mid-2017, as it struggles with emerging market challenges and falling beer sales.

The maker of Smirnoff vodka and Guinness flagged up the news in its interim results for the six months to December 31 (H1), issued today (January 30).

“Over the next two months we will set out detailed plans to simplify our processes and de-layer our organisation,”​ said Diageo ceo Ivan Menezes.

“This will create a more agile, accountable and effective organisation to deliver our performance ambition. I expect this to deliver cost savings of £200M a year by the end of fiscal 2017.” ​It was too early to give further details, he told analysts in a conference call this morning.

The company estimated restructuring costs would be "between £200M and £250M".

‘Tough half’

In summary, he told them it had been a “tough half”​, but added: “I do believe our brands are well-positioned to go into the second term.”​ He said he was more optimistic about business performance during the second half of the financial year, but did not expect market volatility to get any better.

Numis analyst Wyn Ellis issued a note saying he expected consensus estimates of business performance to be revised downwards.

“Volume and margin trends were disappointing in H1, driven by weakness in emerging markets: North America remains the driver of the business, but even here some modest slowdown is anticipated …

‘Continued volatility’

“We expect continued volatility in emerging markets and in currencies (Diageo expects a £280M hit from currency translation for the full year).”

Diageo posted organic net sales up 1.8% and reported operating profit up by 1% in the six month period to £2.06bn.

While the firm grew net sales in Great Britain (GB), organic net value sales dropped by 1% across Western Europe driven by a tough economy in southern Europe and Ireland and weak beer sales.

Overall volume sales in Western Europe declined by 2% and global value sales of beer slumped by 3%.

Diageo claimed its growth in GB was driven by reserve brands including Ciroc and Talisker and by innovations such as Smirnoff Gold and Baileys Chocolate Luxe.

Winners and losers

Elsewhere in GB there were winners and losers. Guinness performance was flat, while net sales for Bell’s whisky plunged by 21%, hit hard by the decision to hold its price. Pricing and promotional activity also dragged Smirnoff net sales down by 2%.

However, the good summer weather almost trebled net value sales for Pimm’s, while Captain Morgan rum performed well as a result of increased marketing activity.

Net value sales in Diageo’s Asia Pacific market fell by 6%, with Chinese white spirit sales damaged by anti-extravagance measures and South East Asia hit by weakness in Thailand.

There was strong growth in reserve brands such as Ciroc and Bulleit in North America, driving up net value sales by 5% overall, although volume sales dropped by 2%.

Net value sales rose by 2% in Africa, Eastern Europe and Turkey, while net volume sales fell by 4%. Net sales rose by 8% in Latin America and the Caribbean.

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