Operating results 2009 compared with 2008
Summary consolidated income statement
| Year ended 30 June | ||
|---|---|---|
| 2009 £ million | 2008 £ million |
|
| Sales | 12,283 | 10,643 |
| Excise duties | (2,972) | (2,553) |
| Net sales | 9,311 | 8,090 |
| Operating costs | (6,698) | (5,786) |
| Operating profit before exceptional items | 2,613 | 2,304 |
| Exceptional items | (170) | (78) |
| Operating profit | 2,443 | 2,226 |
| Sale of businesses | – | 9 |
| Net finance charges | (592) | (319) |
| Share of associates’ profits after tax | 164 | 177 |
| Profit before taxation | 2,015 | 2,093 |
| Taxation | (292) | (522) |
| Profit from continuing operations | 1,723 | 1,571 |
| Discontinued operations | 2 | 26 |
| Profit for the year | 1,725 | 1,597 |
| Attributable to: | ||
| Equity shareholders | 1,621 | 1,521 |
| Minority interests | 104 | 76 |
| 1,725 | 1,597 |
Sales and net sales
On a reported basis, sales increased by £1,640 million from £10,643 million in the year ended 30 June 2008 to £12,283 million in the year ended 30 June 2009. On a reported basis net sales increased by £1,221 million from £8,090 million in the year ended 30 June 2008 to £9,311 million in the year ended 30 June 2009. Exchange rate movements increased reported sales by £1,362 million and reported net sales by £1,095 million. Acquisitions increased in reported sales by £160 million and reported net sales by £151 million for the year.
Operating costs before exceptional items
On a reported basis, operating costs before exceptional items increased by £912 million in the year ended 30 June 2009 due to an increase in cost of sales of £623 million, from £3,245 million to £3,868 million, an increase in marketing expenses of £73 million, from £1,239 million to £1,312 million, and an increase in other operating expenses of £216 million, from £1,302 million to £1,518 million. The impact of exchange rate movements increased total operating costs before exceptional items by £928 million.
Exceptional items
Exceptional items are those that, in management’s judgement, need to be disclosed by virtue of their size or incidence in order for the user to obtain a proper understanding of the financial information.
Exceptional costs totalling £170 million, being £166 million in respect of the global restructuring programme and £4 million in respect of the restructuring of Irish brewing operations are included within operating costs for the year ended 30 June 2009. Exceptional costs of £78 million in respect of the restructuring of Irish brewing operations were included within operating costs in the year ended 30 June 2008.
Post employment plans
Post employment costs for the year ended 30 June 2009 were £63 million (2008 – £53 million) of which £65 million (2008 – £99 million) was included in operating costs and income of £2 million (2008 – £46 million) was included in net finance charges. Exceptional pension curtailment gains were £32 million for the year ended 30 June 2009.
The deficit before taxation in respect of post employment plans increased by £975 million from £408 million at 30 June 2008 to £1,383 million at 30 June 2009. The increase in the deficit is primarily a result of a reduction in the value of the assets held by the plans, and a lower discount rate, partly offset by a lower inflation rate.
Operating profit
Reported operating profit for the year ended 30 June 2009 increased by £217 million to £2,443 million from £2,226 million in the prior year. Exchange rate movements increased operating profit for the year ended 30 June 2009 by £154 million. Excluding exceptional costs, operating profit for the year ended 30 June 2009 increased by £309 million to £2,613 million from £2,304 million in the prior year. Exchange rate movements increased operating profit before exceptional items by £167 million.
Acquisitions
Brand additions made in the year ended 30 June 2008, principally Ketel One vodka, Rosenblum Cellars wine and the distribution rights for Zacapa rum, contributed £151 million to net sales and £43 million to operating profit in the year ended 30 June 2009 in addition to the organic element.
Sale of businesses
In the year ended 30 June 2008, a gain of £9 million arose from the sale of businesses.
Net finance charges
Net finance charges increased from £319 million in the year ended 30 June 2008 to £592 million in the year ended 30 June 2009.
The net interest charge for the year ended 30 June 2009 increased by £175 million to £516 million from £341 million in the prior year. This increase resulted principally from the increase in net borrowings in the year, adverse exchange rate movements of £64 million and an increase in the adverse impact of the revaluation to year end market rates of interest rate swaps under IAS 39 of £8 million.
Net other finance charges for the year ended 30 June 2009 were £76 million (2008 – net other finance income of £22 million). There was a reduction of £44 million in income in respect of the group’s post employment plans from £46 million in the year ended 30 June 2008 to £2 million in the year ended 30 June 2009. Other finance charges also include £33 million (2008 – £5 million income) in respect of exchange rate translation differences on inter-company funding arrangements that do not meet the accounting criteria for recognition in equity, £11 million (2008 – £6 million) in respect of exchange movements on net borrowings not in a hedge relationship and therefore recognised in the income statement, £21 million (2008 – £17 million) on unwinding of discounts on liabilities and £13 million (2008 – £6 million) in respect of other finance charges.
Associates
The group’s share of associates’ profits after interest and tax was £164 million for the year ended 30 June 2009 compared to £177 million in the prior year. Diageo’s 34% equity interest in Moët Hennessy contributed £151 million (2008 – £161 million) to share of associates’ profits after interest and tax.
Profit before taxation
Profit before taxation decreased by £78 million from £2,093 million to £2,015 million in the year ended 30 June 2009.
Taxation
The reported tax rate for the year ended 30 June 2009 is 14.5% compared with 24.9% for the year ended 30 June 2008. Factors that reduced the reported tax rate in the year included settlements agreed with tax authorities that gave rise to changes in the value of deferred tax assets and tax provisions. The underlying tax rate for continuing operations for the year ended 30 June 2009 was 22.2% compared with 24.5% for the year ended 30 June 2008. The underlying tax rate for the year ending 30 June 2010 is expected to be 22%.
Discontinued operations
In connection with the past disposal of the Pillsbury business, Diageo guaranteed debt of a third party until November 2009 and profit after tax from discontinued operations in the year ended 30 June 2009 of £2 million (2008 – £2 million) represents a provision release in respect of this. In the year ended 30 June 2008 there was a £24 million tax credit relating to the disposal of the Pillsbury business.
Exchange rate movements
For the year ending 30 June 2010 at current exchange rates (US$/£1.65, €/£1.15) foreign exchange movements (excluding the exchange impacts of IAS 21 and IAS 39) are estimated to increase operating profit by £80 million and decrease the interest charge by £10 million.
Dividend
The directors recommend a final dividend of 22.20 pence per share, an increase of 5% on last year’s final dividend. The full dividend would therefore be 36.10 pence per share, an increase of 5.1% from the year ended 30 June 2008. Subject to approval by shareholders, the final dividend will be paid on 19 October 2009 to shareholders on the register on 11 September 2009. Payment to US ADR holders will be made on 23 October 2009. A dividend reinvestment plan is available in respect of the final dividend and the plan notice date is 28 September 2009.
Return on average total invested capital
Calculations for the return on average total invested capital for the years ended 30 June 2009 and 30 June 2008 were as follows:
| 2009 £ million | 2008 £ million |
|
|---|---|---|
| Operating profit | 2,443 | 2,226 |
| Exceptional items | 170 | 78 |
| Associates’ profits after interest and tax | 164 | 177 |
| Tax at the underlying tax rate of 22.2% (2008 – 24.5%)* | (616) | (608) |
| 2,161 | 1,873 | |
| Average net assets (excluding net post employment liabilities) | 4,810 | 4,411 |
| Average net borrowings | 7,427 | 5,672 |
| Average integration and restructuring costs (net of tax) | 1,049 | 955 |
| Goodwill at 1 July 2004 | 1,562 | 1,562 |
| Average total invested capital | 14,848 | 12,600 |
| Return on average total invested capital | 14.6% | 14.9% |
Economic profit
Calculations for economic profit for the years ended 30 June 2009 and 30 June 2008 were as follows:
| 2009 £ million | 2008 £ million |
|
|---|---|---|
| Average total invested capital (see above) | 14,848 | 12,600 |
| Operating profit | 2,443 | 2,226 |
| Exceptional items | 170 | 78 |
| Associates’ profits after interest and tax | 164 | 177 |
| Tax at the underlying tax rate of 22.2% (2008 – 24.5%)* | (616) | (608) |
| 2,161 | 1,873 | |
| Capital charge at 9% of average total invested capital | (1,336) | (1,134) |
| Economic profit | 825 | 739 |
* The group’s reported tax rate for the year ended 30 June 2009 is 14.5% (2008 – 24.9%). Adjusting the reported tax rate to exclude the exceptional tax credit of £155 million in respect of the impact of settlements agreed with tax authorities and the net operating exceptional charges of £170 million and the associated tax credit of £37 million, the group has an underlying tax rate of 22.2% for the year ended 30 June 2009. Adjusting the reported tax rate for the year ended 30 June 2008 to exclude the net exceptional charges of £69 million and the associated tax credit of £8 million, the group had an underlying tax rate of 24.5%.
Analysis by business area and brand
In order to assist the reader of the financial statements, the following comparison of 2009 with 2008 includes tables which present the exchange, acquisitions and disposals and organic components of the year on year movement for each of volume, sales, net sales and operating profit. Organic movements in the tables below are calculated as follows:
(a) The organic movement percentage is the amount in the column headed Organic movement in the tables below expressed as a percentage of the aggregate of the column headed 2008 Reported, the column headed Exchange and the amounts, if any, in respect of disposals and transfers included in the column headed Acquisitions, disposals and transfers. The inclusion of the column headed Exchange in the organic movement calculation reflects the adjustment to recalculate the prior period results as if they had been generated at the current period’s exchange rates.
(b) Where a business, brand, brand distribution right or agency agreement was disposed of, or terminated, in the current period, the group, in organic movement calculations, adjusts the results for the comparable prior period to exclude the amount the group earned in that period that it could not have earned in the current period (i.e. the period between the date in the prior period, equivalent to the date of the disposal in the current period, and the end of the prior period). As a result, the organic movement numbers reflect only comparable performance. Similarly, if a business was disposed of part way through the equivalent prior period, then its contribution would be completely excluded from that prior period’s performance in the organic movement calculation, since the group recognised no contribution from that business in the current period. In the calculation of operating profit, the overheads included in disposals are only those directly attributable to the businesses disposed of, and do not result from subjective judgements of management. For acquisitions, a similar adjustment is made in the organic movement calculations. For acquisitions subsequent to the end of the equivalent prior period, the post acquisition results in the current period are excluded from the organic movement calculations. For acquisitions in the prior period, post acquisition results are included in full in the prior period but are only included from the anniversary of the acquisition date in the current period.
The organic movement calculations for volume, sales, net sales and operating profit before exceptional items for the year ended 30 June 2009 were as follows:
| 2008 Reported units million | Acquisitions, disposals and transfers units million | Organic movement units million | 2009 Reported units million | Organic movement % |
|
|---|---|---|---|---|---|
| Volume | |||||
| North America | 51.1 | 1.8 | 0.1 | 53.0 | – |
| Europe | 41.6 | – | (2.6) | 39.0 | (6) |
| International | 39.1 | – | (1.6) | 37.5 | (4) |
| Asia Pacific | 13.2 | – | (1.4) | 11.8 | (11) |
| Total volume | 145.0 | 1.8 | (5.5) | 141.3 | (4) |
| 2008 Reported £ million | Exchange £ million | Acquisitions, disposals and transfers £ million | Organic movement £ million | 2009 Reported £ million | Organic movement % |
|
|---|---|---|---|---|---|---|
| Sales | ||||||
| North America | 2,965 | 715 | 149 | 29 | 3,858 | 1 |
| Europe | 4,046 | 353 | 7 | (127) | 4,279 | (3) |
| International | 2,376 | 192 | 3 | 232 | 2,803 | 9 |
| Asia Pacific | 1,168 | 99 | 1 | – | 1,268 | – |
| Corporate | 88 | 3 | – | (16) | 75 | (18) |
| Total sales | 10,643 | 1,362 | 160 | 118 | 12,283 | 1 |
| Acquisitions, 2008 Reported £ million | Exchange £ million | Acquisitions, disposals and transfers £ million | Organic movement £ million | 2009 Reported £ million | Organic movement % |
|
|---|---|---|---|---|---|---|
| Net sales | ||||||
| North America | 2,523 | 602 | 142 | 23 | 3,290 | 1 |
| Europe | 2,630 | 260 | 6 | (146) | 2,750 | (5) |
| International | 1,971 | 156 | 2 | 157 | 2,286 | 7 |
| Asia Pacific | 877 | 74 | 1 | (42) | 910 | (4) |
| Corporate | 89 | 3 | – | (17) | 75 | (18) |
| Total net sales | 8,090 | 1,095 | 151 | (25) | 9,311 | – |
| Excise duties | 2,553 | 2,972 | ||||
| Total sales | 10,643 | 12,283 | ||||
| Operating profit | ||||||
| North America | 907 | 206 | 45 | (2) | 1,156 | – |
| Europe | 798 | 66 | (2) | (6) | 856 | (1) |
| International | 593 | (5) | – | 57 | 645 | 10 |
| Asia Pacific | 170 | (6) | – | – | 164 | – |
| Corporate | (164) | (94) | – | 50 | (208) | – |
| Total operating profit before exceptional items | 2,304 | 167 | 43 | 99 | 2,613 | 4 |
| Exceptional items | (78) | (170) | ||||
| Total operating profit | 2,226 | 2,443 |
- Notes
- (1) The exchange adjustments for sales, net sales and operating profit are primarily the retranslation of prior period reported results at current period exchange rates and are principally in respect of the US dollar and the euro.
- (2) The impacts of acquisitions, disposals and transfers are excluded from the organic movement percentages. Transfers represent the movement between operating units of certain activities. In the year ended 30 June 2009:
- Acquisitions in the year ended 30 June 2008 that affected volume, sales, net sales and operating profit were the acquisitions of Ketel One Worldwide BV, Rosenblum Cellars and the distribution rights for Zacapa rum
- There were no disposals
- There were no transfers
- (3) Operating exceptional items in the year ended 30 June 2009 comprised charges of £166 million in respect of the global restructuring programme and £4 million in respect of the restructuring of Irish brewing operations. Operating exceptional items in the year ended 30 June 2008 comprised restructuring costs for Irish brewing operations of £78 million.
Corporate revenue and costs
Net sales decreased by £14 million in the year ended 30 June 2009 to £75 million, from £89 million in the prior year. Net operating costs before exceptional items increased by £44 million in the year ended 30 June 2009 to £208 million, from £164 million in the prior year.
Diageo undertakes the majority of its currency transaction hedging centrally and therefore £86 million of negative year on year transaction impact was taken to Corporate. In addition there was a negative year on year translation impact of £8 million in Corporate. The regions are reported using forecast transaction exchange rates with the difference between forecast and achieved rates being included in Corporate. This amounted to a benefit of £38 million in the year. There was a £12 million reduction in underlying Corporate net costs.
North America
Key highlights
- Despite the difficult economic environment, North America delivered net sales growth
- Total spirits volume grew 1% with 3 percentage points of price/mix. Smirnoff vodka, Captain Morgan and José Cuervo positioned in the more resilient premium segment contributed most to net sales growth
- Vodka remained the largest and most resilient of the major categories in the United States. Diageo out-performed the category as a whole, growing net sales 16% led by Smirnoff in the premium segment and Cîroc and Ketel One vodka at higher price points
- Stock levels of beer and malt based ready to drink brands were reduced adversely impacting mix
- Stock levels of spirits have reduced across the supply chain
- Innovation launches contributed significantly to overall performance as the focus on premium spirits line extensions and pre-mixed cocktails capitalised on consumer shifts
- Ketel One vodka performed ahead of expectations
- Marketing spend decreased as a result of media efficiencies and a refocus away from beer and ready to drink, however Diageo’s share of voice in spirits improved
- Net sales growth of 7% in Canada was led by strong performances of Captain Morgan rum of 19% and Smirnoff vodka of 10%
Key measures
| 2009 £ million | 2008 £ million | Organic movement % | Reported movement % |
|
|---|---|---|---|---|
| Volume | – | 4 | ||
| Net sales | 3,290 | 2,523 | 1 | 30 |
| Marketing spend | 429 | 366 | (9) | 17 |
| Operating profit before exceptional items | 1,156 | 907 | – | 27 |
| Operating profit | 1,131 | 907 | – | 25 |
Reported performance
Net sales increased by £767 million in the year ended 30 June 2009 to £3,290 million, from £2,523 million in the prior year. Reported operating profit before exceptional items increased by £249 million in the year ended 30 June 2009 to £1,156 million, from £907 million in the prior year. Operating profit increased by £224 million in the year ended 30 June 2009 to £1,131 million, from £907 million in the prior year.
Organic performance
The weighted average exchange rate used to translate US dollar sales and profit moved from £1 = $2.01 in the year ended 30 June 2008 to £1 = $1.60 in the year ended 30 June 2009. Exchange rate impacts increased net sales by £602 million, acquisitions increased net sales by £142 million and there was an organic increase in net sales of £23 million. Exchange rate impacts increased operating profit by £206 million, acquisitions increased operating profit by £45 million and there was an organic decrease in operating profit of £2 million.
Despite the economic climate, the total beverage alcohol market in North America grew in both volume and value. Within spirits, there has been a trend for consumers to trade out of the super and ultra premium segments and down to lower price segments; however the premium segment, where Diageo is most represented, has proved the most resilient and has gained share of the overall spirits category. As consumer demand slowed stock levels reduced in aggregate across the whole supply chain. Spirits stocks with distributors at the end of June 2009 were higher when compared to June 2008, although there has been a significant reduction in absolute levels since December. Stock levels held by retailers are down year on year. The planned beer and ready to drink stock reduction was completed successfully resulting in net sales declines of 6% in beer and 8% in ready to drink. The slowdown of the wine category, especially at price points above $25 per bottle has led to a decline in Diageo wine net sales of 7%. Overall price/mix of 1 percentage point was achieved by strong price increases in the first half on premium brands partially offset by negative mix driven by volume declines in the higher net sales per case scotch category and ready to drink segment.
Smirnoff vodka grew as a result of higher marketing spend and price increases on Smirnoff Red. Marketing spend increased 2% behind core growth drivers reinforcing the quality message combined with investment behind innovation launches on the Smirnoff Flavours range.
Johnnie Walker was impacted by the economic climate that led to the total scotch category declining 3% in value with weaker performance in the deluxe segment. Johnnie Walker Red Label net sales declined 2% and Black Label declined 7% but both gained share of their segments while maintaining price premiums. In the super deluxe segment, Johnnie Walker Blue Label experienced double digit declines and marketing spend was re-directed towards Johnnie Walker Black Label. Investment behind the ‘Strides’ marketing campaign and driving loyalty through relationship marketing have led to strong improvements across key brand equity measures.
| Brand performance | Organic volume movement % | Organic net sales movement % | Reported volume movement % | Reported net sales movement % |
|---|---|---|---|---|
| Global priority brands | (2) | (2) | (2) | 22 |
| Local priority brands* | 1 | – | 19 | 47 |
| Category brands* | 6 | 11 | 6 | 36 |
| Total | – | 1 | 4 | 30 |
| Key spirits brands:** | ||||
| Smirnoff | 1 | 6 | 1 | 30 |
| Johnnie Walker | (6) | (8) | (6) | 14 |
| Captain Morgan | 3 | 7 | 3 | 32 |
| Baileys | (5) | (5) | (5) | 16 |
| José Cuervo | 3 | 4 | 3 | 30 |
| Tanqueray | (12) | (12) | (12) | 10 |
| Crown Royal | (1) | (1) | (1) | 23 |
| Guinness | (11) | (6) | (11) | 15 |
| Ready to drink | (10) | (8) | (10) | 14 |
- * Brand additions in the year ended 30 June 2008 Ketel One vodka and Rosenblum Cellars wine are included in local priority brands while Zacapa rum is included in category brands.
- ** Spirits brands excluding ready to drink.
Captain Morgan had a strong year, delivering volume and net sales growth and share gains. Four percentage points of positive price/mix was delivered through price increases on Original Spiced Rum and the launch of the higher priced Captain Morgan 100. Increased marketing spend behind the ‘Got a little Captain in you’ television campaign led to share gains in the rum category and improved brand equity scores.
The liqueur category has been among the hardest hit in the current economic environment and Baileys net sales declined but share was maintained. The decline of Original Irish Cream was partially offset by the successful launch of Baileys with a hint of Coffee.
José Cuervo grew volume 3% and net sales 4%. Share gains on José Cuervo Gold driven by an increase in distribution points and the launch of José Cuervo Silver more than offset weakness in the on-trade.
Tanqueray net sales declined 12% in line with volumes as price increases on the core London Dry variant were offset by faster declines on the higher priced variants Tanqueray No.10 and Rangpur. Marketing investment was reduced as spend was re-directed to fund proven growth drivers on other brands.
Crown Royal volume and net sales declined 1%. Positive net sales growth on the core variant was more than offset by the poor economic conditions impacting the higher priced Reserve and Cask 16 variants. Crown Royal in Canada under-performed the United States, as price increases were not followed by the competition leading to price gaps at retail that impacted volume.
Guinness net sales declined 6% as a result of three factors: the planned stock reduction, consumers trading out of the higher priced imported beer segment and into domestic beer, and overall weakness in the on-trade which particularly impacted keg volume. Price increases on both keg and packaged Guinness contributed 5 percentage points of price/mix.
Local priority brands grew volume 1% and held net sales flat driven by the organic contribution of Ketel One vodka and sales of Seagram’s 7. This was offset by the decline in US wines, in particular on Chalone wines, as consumers traded down from higher price points. To offset this, Diageo wines increased promotional activity in the second half and launched a number of new products at price-points of $10 and below.
Category brand volume grew 6% and net sales grew 11% reflecting the opportunities presented by Diageo’s broad brand range. Cîroc vodka continued its strong growth trajectory, as a result of the combination of Diageo, Sean Combs and the brand itself, and grew volume 137% and net sales 159%. At the other end of the pricing spectrum and capitalising on the consumer shift towards value brands were Gordon’s gin with net sales up 9%, Gordon’s vodka up 11% and Popov vodka up 14%.
Ready to drink net sales declined 8% as a result of segment decline and the planned stock reduction. Diageo continued to innovate in this segment with the launch of several new Smirnoff Ice flavours and a range of ready to serve Smirnoff Cocktails, reflecting the trend for increased at-home consumption.
Marketing spend for the year decreased 9% due to a reduction of investment behind those brands and segments most impacted by the current economic climate and media rate deflation. While investment behind ready to drink, beer and Tanqueray decreased, proven growth drivers elsewhere in the brand range were fully supported, in particular on Captain Morgan, Cîroc vodka and innovation launches. Overall, Diageo’s share of voice of total spirits advertising spend increased 4 percentage points.
Canada has also been affected by the global economic slowdown but it has not experienced contractions on the scale of the United States. Price increases on core spirits together with increased marketing spend behind Smirnoff and Captain Morgan delivered 7% net sales growth.
Gross margin was adversely affected by input cost increases, the negative mix effect of consumers trading down within brands and the volume decline of higher gross margin segments and categories such as ready to drink, scotch and liqueurs. Price increases on core variants taken in the first half plus reductions in overall marketing spend combined to deliver constant operating profit for the year.
Europe
Key highlights
- The region was severely impacted by the economic downturn, with conditions in Spain and Ireland deteriorating significantly
- Great Britain out-performed a declining total beverage alcohol market, growing net sales despite the difficult trading environment
- Russia net sales grew 1% following a strong first half although the worsening economic conditions in the second half led to consumers trading down, driving negative mix. In response to this trend, smaller bottle sizes at lower price points were introduced
- In a declining beer category, Guinness performed well with flat net sales across the region and grew share in the on-trade in Great Britain and Ireland supported by the 250th Anniversary and ‘Alive Inside’ campaigns
Key measures
| 2009 £ million | 2008 £ million | Organic movement % | Reported movement % |
|
|---|---|---|---|---|
| Volume | (6) | (6) | ||
| Net sales | 2,750 | 2,630 | (5) | 5 |
| Marketing spend | 419 | 438 | (14) | (4) |
| Operating profit before exceptional items | 856 | 798 | (1) | 7 |
| Operating profit | 790 | 720 | (1) | 10 |
Reported performance
Net sales increased by £120 million in the year ended 30 June 2009 to £2,750 million, from £2,630 million in the prior year. Reported operating profit before exceptional items increased by £58 million in the year ended 30 June 2009 to £856 million, from £798 million in the prior year. Operating profit increased by £70 million in the year ended 30 June 2009 to £790 million, from £720 million in the prior year.
Organic performance
The weighted average exchange rate used to translate euro sales and profit moved from £1 = €1.36 in the year ended 30 June 2008 to £1 = €1.17 in the year ended 30 June 2009. Exchange rate impacts increased net sales by £260 million, acquisitions increased net sales by £6 million and there was an organic decrease in net sales of £146 million. Exchange rate impacts increased operating profit by £66 million, acquisitions decreased operating profit by £2 million and there was an organic decrease in operating profit of £6 million.
In Great Britain net sales were up 2% driven by strong spirits and wine performance and Diageo gained share of beer in the on-trade and of spirits and wine in the off-trade. Bell’s and Baileys performed strongly with both brands gaining share in the on-trade and off-trade following a robust Christmas. Smirnoff vodka net sales declined 3% as the brand came under increased pressure from heavily promoted competitor brands.
The performance in Ireland was impacted by the continued decline of the total beverage alcohol market where volume declined by 4% and value by 3%. Against this, Guinness net sales were flat as Diageo maintained investment behind the brand with the 250th Anniversary and the ‘Alive inside’ campaigns. For the second consecutive year Guinness grew share in the key Republic of Ireland and Northern Ireland on-trade channels.
In Spain volume was down 21% and net sales were down 20% in line with market trends following the steep decline in the economy from mid-November onwards. Rising unemployment, lower consumer confidence and spending power reduced demand across consumer categories and led to a shift from on-trade to off-trade impacting spirits consumption. Significant de-stocking occurred as limited credit availability in the market led to some wholesalers being unable to fund their stock.
In Russia volume was up 2% and net sales were up 1% following a strong first half performance. Johnnie Walker remained the key brand and accounted for almost 50% of net sales. Price/mix was down 1 percentage point as consumers traded down from deluxe to standard scotch and both Johnnie Walker Red Label and White Horse grew share. In many markets in Eastern Europe Diageo’s key brands gained share.
Smirnoff vodka net sales were down 6% with declines in Great Britain and Spain partially offset by net sales growth in Continental Europe. Smirnoff continued to be the number one premium spirit in Great Britain and grew share in Ireland.
| Brand performance | Organic volume movement % | Organic net sales movement % | Reported volume movement % | Reported net sales movement % |
|---|---|---|---|---|
| Global priority brands | (8) | (6) | (8) | 4 |
| Local priority brands | (6) | (6) | (6) | 4 |
| Category brands* | (1) | (2) | (1) | 8 |
| Total | (6) | (5) | (6) | 5 |
| Key spirits brands:** | ||||
| Smirnoff | (8) | (6) | (8) | – |
| Johnnie Walker | (5) | (4) | (5) | 7 |
| Baileys | (9) | (10) | (9) | – |
| J&B | (13) | (13) | (13) | – |
| Guinness | (6) | – | (6) | 8 |
| Ready to drink | (17) | (11) | (17) | (2) |
* Brand additions in the year ended 30 June 2008 Ketel One vodka, Rosenblum Cellars wine and Zacapa rum are included in category brands.
** Spirits brands excluding ready to drink.
Johnnie Walker net sales decreased by 4% mainly driven by the performance in Spain and Russia. The brand continued to perform well in Greece where Johnnie Walker Black Label grew net sales by 14% following the successful launch of the anniversary pack supported by the ‘Strides’ and ‘Crossroads’ campaigns. The brand benefited from price increases in all markets leading to positive price/mix in the region.
Baileys net sales were down 10%. The overall decline of the brand was mainly due to performance in Iberia, where net sales declined in line with the category. In Great Britain both Baileys Original and the Baileys Flavours variants grew volume and net sales with positive price/mix following the successful launch of Baileys Coffee.
J&B volume and net sales were down 13%, principally due to performance in Iberia where the economic environment has driven a significant decline in consumption and customer stock levels.
In Great Britain Guinness has now delivered 30 consecutive months of volume share growth in the on-trade and therefore despite the difficult on-trade beer segment, net sales of Guinness declined only 1%. In the second half net sales were flat, while the beer market continued to decline driven by the switch from on-trade to off-trade and the increase in beer duty. This share gain was driven by the execution of a new strategy to focus on less frequent purchasers, investment behind the 250th Anniversary and the ‘17:59’ and ‘Alive inside’ campaigns. In Ireland net sales were also flat and Guinness grew share in key on-trade channels.
Local priority brand net sales were down 6% driven by Cacique and Cardhu in Iberia and the agency beer brands in Ireland partially offset by Harp, which benefited from the continued rollout of Harp Ice Cold. Bell’s had good net sales and volume growth in Great Britain, driven by the launch of Bell’s Original supported by a marketing programme called ‘The Spirit of Arthur Bell’ which included television, newspaper and direct mail advertising.
Category brand volume was down 1% and net sales were down 2% with declines in most markets offset by growth in Blossom Hill in Great Britain and growth of White Horse scotch in Russia.
Ready to drink volume was down 17% as the segment continued to decline. Smirnoff Ice volume was down 20% in Great Britain although the brand grew share in the on-trade.
Marketing spend was down 14% across the region particularly driven by Spain and Ireland, countries where the economic conditions were harder and the beverage alcohol consumption declined more significantly.
International
Key highlights
- Volume growth in Africa and price increases in both Africa and Latin America drove net sales growth of 7%
- Volume and net sales growth in Venezuela, Mexico and Brazil, the three largest markets in Latin America offset declines in the duty free channel in Latin America and in the Caribbean
- Strong growth in beer with volume up 5% and net sales up 17%
- Pressure on the Global Travel business due to declining passenger numbers and customer de-stocking
- Marketing spend efficiencies in Latin America and the transition of spend on ready to drink, cider and beer brands into the new South Africa joint venture offset increases on beer and ready to drink elsewhere in Africa
Key measures
| 2009 £ million | 2008 £ million | Organic movement % | Reported movement % |
|
|---|---|---|---|---|
| Volume | (4) | (4) | ||
| Net sales | 2,286 | 1,971 | 7 | 16 |
| Marketing spend | 256 | 244 | (3) | 5 |
| Operating profit before exceptional items | 645 | 593 | 10 | 9 |
| Operating profit | 623 | 593 | 10 | 5 |
Reported performance
Net sales increased by £315 million in the year ended 30 June 2009 to £2,286 million, from £1,971 million in the prior year. Reported operating profit before exceptional items increased by £52 million in the year ended 30 June 2009 to £645 million, from £593 million in the prior year. Operating profit increased by £30 million in the year ended 30 June 2009 to £623 million, from £593 million in the prior year.
Organic performance
Exchange rate impacts increased net sales by £156 million, acquisitions increased net sales by £2 million and there was an organic increase in net sales of £157 million. Exchange rate impacts decreased operating profit by £5 million and there was an organic increase in operating profit of £57 million.
Continued strong performance in Africa and net sales growth in Latin America drove International performance as Global Travel was impacted by the global economic weakness.
In International 70% of scotch net sales are in Latin America where significant price increases were taken in the first half to offset the impact of major devaluations of local currencies. The strengthening of the US dollar particularly impacted the US dollar priced duty free business in the region. In the second half a number of these currencies have strengthened easing volume pressure, and prices have been moderated in line with the currency movement. In Venezuela, Mexico and Brazil volume and net sales grew with strong performances of Buchanan’s, Johnnie Walker and Smirnoff ready to drink.
Similarly Africa accounts for 90% of beer net sales in the region and performed strongly driven by Guinness, local beer brands and a strong innovation pipeline. Although growth slowed in the second half of the year as the region started to be impacted by the global economic downturn, volume was up 2% and net sales grew 16%.
Global Travel continued to be impacted as global economic weakness led to a decline in passenger numbers and de-stocking in travel retail. Lower volume in the super deluxe segment led to negative mix. In the Middle East, volume grew 3% and net sales grew 6% primarily from the growth in standard scotch.
Smirnoff vodka volume was flat and net sales were up 9%. Volume performance was driven by growth in Brazil and South Africa offset by declines in the Global Travel and Middle East business and the Caribbean. Net sales growth was driven by price increases in Brazil and South Africa.
Johnnie Walker volume declined by 12% and net sales by 3%. Johnnie Walker Red Label grew net sales following strong growth in Mexico while Johnnie Walker Black Label net sales were flat. Super deluxe variants net sales declined as growth in Latin America, Africa and the Middle East was offset by declines in Global Travel.
Baileys net sales declined 11% as growth in Venezuela and Africa was offset by the slowdown in the duty free channel.
Buchanan’s net sales grew by 2% with strong volume and net sales growth in Venezuela, the brand’s biggest market with net sales up 24% and in Mexico where net sales were up 28%. Volume and net sales saw declines in the duty free channel in Latin America as a result of de-stocking and credit and currency issues impacted performance.
| Brand performance | Organic volume movement % | Organic net sales movement % | Reported volume movement % | Reported net sales movement % |
|---|---|---|---|---|
| Global priority brands | (5) | 5 | (5) | 12 |
| Local priority brands | – | 9 | – | 20 |
| Category brands* | (5) | 11 | (5) | 20 |
| Total | (4) | 7 | (4) | 16 |
| Key spirits brands:** | ||||
| Smirnoff | – | 9 | – | 17 |
| Johnnie Walker | (12) | (3) | (12) | 2 |
| Baileys | (16) | (11) | (16) | (5) |
| Buchanan’s | (15) | 2 | (15) | 18 |
| Guinness | 2 | 15 | 2 | 28 |
| Ready to drink | 6 | 13 | 6 | 23 |
- * Brand additions in the year ended 30 June 2008 Ketel One vodka, Rosenblum Cellars wine and Zacapa rum are included in category brands.
- ** Spirits brands excluding ready to drink.
Guinness volume was up 2% and net sales grew 15% driven by the continued performance of the brand in Africa where volume was up 4% and net sales up 18%. Strong double-digit net sales growth was achieved in Nigeria, Ghana and East Africa supported by on-trade promotion around English Premier League football.
Local priority brands net sales grew 9% with consistent performance across many markets. There was 7% volume and 15% net sales growth in Africa, notably from Malta Guinness in Nigeria, Pilsner and Tusker in East Africa and Bell’s in South Africa. Price increases across the region offset the impact of the volume decline on scotch in Latin America.
Category brand net sales were up 11% primarily as a result of Harp in Nigeria, Cacique in Venezuela, Senator in East Africa and Star in Ghana.
Ready to drink volume increased by 6% and net sales grew 13% on price increases on Smirnoff ready to drink brands in most markets and volume gains in Latin America, especially Brazil, and in Nigeria. Volume growth in Brazil, Nigeria and Cameroon offset a volume decrease in South Africa where the ready to drink segment declined compared to the prior year.
In a tough trading environment East Africa grew net sales 6%. Excise duty increases on non-malted beer led to declining volumes of Allsopps and Citizen though overall beer volumes were up driven by Guinness, Tusker and Senator. Further excise duty increases negatively impacted the spirits category with total spirits net sales declining 8%.
Nigeria had a strong performance with volume up 22% and net sales up 30% driven by Guinness, Malta Guinness and Harp which all took price increases in the period. Smirnoff Ice performed well with volume up over 50% while Malta Guinness continued to benefit from the bottle relaunch in 2008.
South Africa’s global and local priority brands grew whilst category brands declined as a result of the focus on driving value in scotch. Smirnoff vodka drove global priority brand growth while growth in local priority brands was driven by Bell’s, which grew share and maintained its position as the number one scotch in South Africa.
Ghana faced a challenging year as a result of the economic environment and water shortages in the first half which led to constrained production and a full year volume decline of 6%. Strong pricing led to net sales growth of 24% as price increases were taken to cover off the increase in cost of goods arising as a result of the devaluation of the Cedi.
Cameroon performed well with volume up 17% and net sales up 19%. Volume performance was driven by Guinness, Saltzenbrau and the successful launch of Smirnoff Ice in November. Net sales grew two percentage points ahead of volume as price increases on Guinness offset the small price decrease on Malta Quench, which brought it in line with competitor brands.
In Mexico strong volume and net sales growth of Johnnie Walker and Buchanan’s drove overall scotch net sales up 38% and maintained Diageo’s leadership position in the scotch category.
In Paraguay, Uruguay and Brazil volume declines in scotch were partially offset by growth in Smirnoff vodka while net sales grew as price increases, particularly on scotch brands were made in the individual markets. Positive channel mix with stronger volumes from the higher value Brazil domestic channel helped to grow the top line.
Strong performance of deluxe and super deluxe scotch along with Cacique growth ahead of the rum category drove volume and net sales growth in Venezuela. Johnnie Walker, Buchanan’s and Old Parr all grew net sales by double digits as price increases were put through in line with Diageo’s scotch strategy.
Marketing spend in the region declined by 3% as increased spend in Nigeria and Cameroon was offset by efficiencies in Latin America and the transfer of ready to drink, cider and beer brand spend to the new South African venture.
Asia Pacific
Key highlights
- Net sales declines were primarily driven by the impact of the excise duty increase on ready to drink products in Australia
- Declining consumer confidence and supply chain inventory reductions have impacted performance particularly in China and South East Asia
- Top and bottom line growth in Korea and share gains for Windsor following the return to in-market company distribution
- Price/mix benefit of 7 percentage points came from the return to in-market distribution in Korea and strong price increases on scotch brands offset by negative product mix from lower volume in the higher net sales per case ready to drink segment
- Marketing spend decreased 5% although investment behind spirits grew 7% reflecting the importance of this category to future growth of the region
Key measures
| 2009 £ million | 2008 £ million | Organic movement % | Reported movement % |
|
|---|---|---|---|---|
| Volume | (11) | (11) | ||
| Net sales | 910 | 877 | (4) | 4 |
| Marketing spend | 208 | 191 | (5) | 9 |
| Operating profit before exceptional items | 164 | 170 | – | (4) |
| Operating profit | 128 | 170 | – | (25) |
Reported performance
Net sales increased by £33 million in the year ended 30 June 2009 to £910 million, from £877 million in the prior year. Reported operating profit before exceptional items decreased by £6 million in the year ended 30 June 2009 to £164 million, from £170 million in the prior year. Operating profit decreased by £42 million in the year ended 30 June 2009 to £128 million, from £170 million in the prior year.
Organic performance
Exchange rate impacts increased net sales by £74 million, acquisitions increased net sales by £1 million and there was an organic decrease in net sales of £42 million. Exchange rate impacts decreased operating profit by £6 million and there was no organic movement in operating profit.
Smirnoff vodka grew volume 1% and net sales 13% in the region led by a strong performance from Australia, which grew volume 12% and net sales 38%. Strong price/mix was delivered by price increases taken in the first half combined with positive mix from the strong volume growth of the higher priced Smirnoff Black variant due to the successful ‘Bond’ activation.
Johnnie Walker performance across the region was heavily impacted by the economic slowdown, which impacted consumer confidence and led to weakness in the on-trade and supply chain inventory reductions in key markets. Within the variants, Johnnie Walker Red Label performed well in the standard segment with net sales down 6% and grew share in its largest markets of Thailand and Australia.
Johnnie Walker Black Label and super deluxe were down 13% as they were disproportionately affected by the weakness of the traditional on-trade in key markets such as China and South East Asia. The successful launch of Johnnie Walker Gold Label Reserve across the region provided a new premium offering for the brand and partially mitigated declines in the super deluxe segment.
Bundaberg rum in Australia benefited from consumers trading out of the ready to drink segment but remaining loyal to the brand, and delivered 17% volume growth. Price increases implemented in the first half taken together with the successful launch of the premium priced Bundaberg Red combined to deliver 12 percentage points of price/mix and share gains.
Windsor continued to grow share in its largest market of Korea, more than offsetting the scotch category decline and also benefited from the return of in-market distribution to deliver net sales growth of 23% in Korea. Price increases on the main 12 and 17 year-old variants plus the introduction of a new bottle design led to Windsor ending the year as the clear number one scotch brand in Korea having gained 5 percentage points of share.
Guinness grew net sales 6% as the brand proved resilient in the turbulent economic environment, growing 11% in its largest market of South East Asia.
Australia remained the key market for Diageo’s ready to drink brands in Asia Pacific. A 70% duty increase on spirit-based ready to drink brands imposed by the Australian government in April 2008 resulted in a decrease of 27% in volume and 23% in net sales in Australia this year.
| Brand performance | Organic volume movement % | Organic net sales movement % | Reported volume movement % | Reported net sales movement % |
|---|---|---|---|---|
| Global priority brands | (14) | (8) | (14) | 2 |
| Local priority brands | (1) | 8 | (1) | 8 |
| Category brands* | (10) | (8) | (10) | 3 |
| Total | (11) | (4) | (11) | 4 |
| Key spirits brands:** | ||||
| Smirnoff | 1 | 13 | 1 | 24 |
| Johnnie Walker | (20) | (12) | (20) | (1) |
| Bundaberg rum | 17 | 29 | 17 | 34 |
| Windsor | 3 | 22 | 3 | 17 |
| Guinness | 5 | 6 | 5 | 20 |
| Ready to drink | (26) | (22) | (26) | (17) |
* Brand additions in the year ended 30 June 2008 Ketel One vodka, Rosenblum Cellars wine and Zacapa rum are included in category brands.
** Spirits brands excluding ready to drink.
The impact of this duty increase was less severe in the final quarter as sales began to lap higher prices from the last financial year.
Local priority brands, mainly comprised of Windsor in Korea and Bundaberg in Australia, grew net sales 8%.
Category brands net sales declined 8% primarily as a result of volume decline in value scotch brands such as Haig in India and Spey Royal in Thailand in line with Diageo’s scotch value strategy.
In Australia net sales declined 10% as the weakness in the ready to drink segment was partially offset by a 13% net sales increase on spirits. This was driven by share gains on Bundaberg and Johnnie Walker and a successful innovation programme on the Bundaberg and Smirnoff trademarks. Excluding ready to drink, Australia grew net sales 11%.
A full year of sales through the normal route to market in Korea had a positive effect on price/mix as volume was down 3% but net sales were up 16% reflecting higher net sales per case rates than in the comparable period. The two main brands in Korea, Windsor and Johnnie Walker, both grew volume and net sales, more than offsetting scotch category declines.
In China, low consumer confidence levels severely impacted consumption occasions as consumers reduced purchase frequency, especially in the traditional on-trade channel which accounts for almost half of the sales of international spirits in the market. In addition, trade de-stocking at the secondary and tertiary tiers reduced volumes to wholesalers in the South and East of the country where Johnnie Walker is strongest. Net sales of brands through the Diageo China organisation grew strongly albeit from a low base as they derived the majority of sales through the modern on-trade channel which has been less impacted by the financial crisis.
In India net sales declined 3%. Inappropriately high stock levels across many brands at 31 December 2008 were de-stocked in the second half. For the full year the volume decline in Smirnoff and Haig was only partially offset by growth in Johnnie Walker, Shark Tooth and VAT 69.
Taiwan grew net sales 7%. Price increases on Johnnie Walker and the continued success of The Singleton roll out combined to outperform the 11% volume decline in the scotch category.
Thailand saw net sales decline 3% but recorded share gains on Johnnie Walker Red and Black Labels, Benmore and Smirnoff.
Marketing spend declined 5% overall as a result of the reduction in spend behind ready to drink in Australia. However, investment behind spirits increased 7% reflecting the benefit of the transfer of advertising spend back to the in-market company in Korea and the importance of this category to future growth.