Emerging Markets Boost Profits at Diageo

The world's biggest alcoholic drinks maker Diageo, producer of Smirnoff vodka, Johnnie Walker whisky and Guinness has enjoyed a profitable six months. But the drinks maker has admitted a sharp decline in sales of Guinness in its homeland Ireland which pushed European beer sales down by 4%. However increased sales of Johnnie Walker Whisky and rapid growth in the Asia-Pacific, African and South American markets boosted the company's earnings.

Diageo's chief executive Paul Walsh spoke to World Business News' Russell Padmore about why plans have been shelved for a new Guinness production plant in Ireland.

First broadcast on World Business News 10 February 2011. The full transcript is below:

Paul Walsh: I think long term Guinness has got a very bright future. We were originally going to redevelop our brewery site in Dublin, and that was because the locked land value on that site is quite high. Clearly that situation has changed, and therefore we need to revisit all of our investment ideas in that market. Now all that said, Guinness from a global perspective is performing very well.

Russell Padmore: Particularly in Africa. I noticed that you quote East Africa, Nigeria, Cameroon as strong performance areas for the company. Have you been spending much more on advertising in those nations?

PW: We have, in fact we have a very, very strong footprint in Sub-Sahara Africa, and we continue to invest behind our brands, and we continue to invest in new companies. We recently completed the acquisition of Serengeti Breweries in Tanzania and I expect that trend to continue.

RP: And of course, it is all about convincing people to buy not only the beers that you produce but also some of the spirits. Johnnie Walker whisky has certainly been a big performer for the company, particularly in emerging markets, I see sales of that have grown more than 20% in the period.

PW: Johnnie Walker is performing very, very well. In fact, the whole of our Scotch whisky portfolio is performing well, primarily out of the emerging markets and we expect that to continue. So we are very pleased with scotch, and of course this is good for the UK because it is a major export.

RP: And of course, on top of that, let's remember it's Irish whiskey too; you are selling Bushmills for example. But I get the impression that you are spending much more on marketing of these products, especially in the Asia-Pacific region. Are you getting return on the advertising then?

PW: We believe we will. Advertising has got a certain payback period. You will see in the first half, we have accelerated our marketing spend. We increased marketing spend by 10%. To invest behind the momentum that we are seeing build in many markets. So I do expect to get a return. We have got incredibly strong brands. Our job is to make them stronger.

RP: One of your strong brands, Smirnoff vodka, isn't doing so well in the US. Have Americans suddenly stopped drinking vodka or are they just not drinking the vodka that you make?

PW: The vodka category in the US is actually accelerating growth at the ultra premium end, rather than just premium. And our brands of Ketel One and Ciroc are performing very, very well. In fact, Ciroc is up a staggering 160% year-on-year.

RP: So your own product is effectively undermining another brand, that's maybe a problem that the marketing people need to sort out in the US, or is it all about pricing?

PW: It's all about pricing. It's all about trying to migrate consumers into higher price point offerings. And what is very gratifying in this set of numbers is that you are seeing an improvement in mix. When the economic slowdown hit, we saw people trade down. They are now coming back and trading up the ladder.

RP: And if we look to your sales in Eastern Europe including Russia alongside that, sales during the period up something like 20%. Suddenly this is becoming a key market for you, much more important than it might have been in recent years?

PW: Absolutely. It is very interesting because we have been investing in these emerging markets, the developing markets for many years. You are now starting to see those investments really pay off.

RP: And to the future, what do you see being the real challenge because we are in a time of real challenges for economies in Europe, the US economy is still not back on track. How are you going to position yourself to take advantage of the upturn in those richer nations when it finally comes along, when finally we see many more people back working, many people having much more money in their pocket, and that of course is money that you want to get your hands on. How are you going to position yourself for the upturn?

PW: We are going to continue to invest in the emerging markets, and those investments are serving us very well. I am encouraged that we are starting to see momentum build again in the US we will invest behind that momentum. And in Europe, I do believe that in those economies, particularly in Southern Europe where consumer confidence is weak, that will remain so in the short term. Our job as marketers is to make sure that our brands remain vital even though we know that consumer demand will be weak in the foreseeable future. We will offset that by mining growth in Russia, in Eastern Europe, and in markets like Germany and France.