By Simon Zekaria
LONDON--Diageo PLC (DGE.LN) Thursday said it is preparing for a
possible further downturn in Europe's economy by paring down stock
of its premium spirits and slashing costs in the troubled
region.
Though the U.K. drinks giant's growth is being driven by
emerging markets and North America, Europe still accounts for 27%
of its worldwide sales. Fledgling growth from Eastern Europe,
Russia and Turkey is now supporting the business, as Western and
Southern Europe drag.
Diageo has felt particular pain across Spain, Portugal, Greece
and Italy, which represent 5% of its global sales. Government
austerity measures, below-inflation pay rises and unemployment are
squeezing spending, which is hitting trading.
"We do think [next year] will be as, if not more, challenging
than [this year] given some of the credit constraints in Spain and
elsewhere. We are ready for whatever may occur in terms of the euro
zone, but we are not anticipating one or another specific
scenario," said Chief Financial Officer Deirdre Mahlan.
"We are working really carefully to manage our debt levels and
so we have been looking to destock where we see there is a concern.
We took about a month's stock out of Greece. We have also been
watching carefully Spain and Italy."
The company has previously said a Greek exit from the European
single currency could have a marked impact on its sales. Economists
are concerned that such a move would lead to rapid depreciation of
the drachma--the currency that Greece would adopt
thereafter--hitting trading of businesses like Diageo, which will
face rising import costs. The drinks giant is totally reliant on
imported spirits into the country, including whisky, gin, vodka and
tequila.
In the year to June 30, Diageo's business in Europe showed an
improved performance compared with a year earlier, but sales
excluding acquisitions, disposals and currency effects still
slipped 1%. Operating profit rose 3%, as the maker of Johnnie
Walker Scotch whisky, Guinness stout and Captain Morgan rum cut
costs.
Write to Simon Zekaria at simon.zekaria@dowjones.com