Diageo sees U.S. uptick, eyes Fortune spirits unit

By Dow Jones Newswires
Posted Dec. 14, 2010 at 10:24 a.m.

U.K.-based Diageo PLC, the world’s largest spirits company by volume, said Tuesday it is seeing signs of a recovery in demand in the U.S., though the consumer environment in the country remains unsettled.

“The fiscal 2011 situation remains unsettled, but we see signs of recovery. There is still high unemployment and low consumer confidence, but there are emerging, positive signs of life in fall retail sales. We are encouraged (by that),” Ivan Menezes, Diageo’s president of North America and chairman of the Asia-Pacific region, said on a call with investors.

Menezes said its tequila brand, Jose Cuervo, is showing “sequential” volume growth, despite “sluggish” brand positioning. On the group’s spiced rum, Captain Morgan, he said the company is determined to keep a price status as befits the premium segment, in the face of competition from lower-cost rivals.

“We remain positive about the (U.S.) outlook for the first half. We are confident that our brands and businesses are well-positioned,” he said.

He added that as the U.S. on-trade business moves toward growth, the company will increase marketing spending and push through pricing increases where appropriate. “We are staying agile (on pricing). You can expect us to stay on course on driving price and mix improvements.”

Diageo’s sales have been hit as Europe and North America continue to suffer from the economic downturn. The group recently launched a major marketing initiative in the U.S., including an advertising campaign for Guinness stout fronted by famous sports personalities, aimed at attracting new customers and winning back old ones who may have switched to lower-priced brands during the recession.

“The last 24 months in North America have been challenging. We made many adjustments to our business,” Menezes said. He also noted the group forecasts full-year margin improvements for the region, supported by cost reduction measures. “Month on month, productivity is coming through,” he said.

Separately, the group reiterated it is scrutinizing the fallout from Fortune Brands Inc.’s  decision to split into three businesses, including its global drinks and wine unit, which includes Courvoisier cognac as well as bourbon brands Jim Beam and Maker’s Mark. “We are looking at the developments as the industry consolidates,” Menezes said, declining to eloborate.

Diageo is understood to be particularly interested in adding bourbon brands to its portfoilo. However, the London-based maker of Smirnoff Vodka, Baileys Irish Cream liqueur and Guinness stout, which also owns Johnnie Walker whisky and a stake in Hennessey cognac through a joint venture with French luxury goods company LVMH Moet Hennessy Louis Vuitton (MC.FR), may be prevented from bidding for the whole unit due to competition concerns.

In October, Diageo posted a rise in first-quarter sales driven by growth in emerging markets and reiterated its full-year guidance to grow operating profit by more than the 2 percent rise seen in fiscal 2010.

The company continues to increase its marketing spending in developing economies to build brands and sales. Tuesday, Menezes said being positioned to take advantage of the growing number of Chinese travellers is a key strategic focus for the next five to 10 years. “We look at the travel retail business as a very important brand-building channel.”

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