By Peter Evans
LONDON-- Diageo PLC said it was yet to feel any benefit from the
improving U.S. economy as demand cooled for many of its major
liquor brands across the world and first-half profit fell.
Sales of Johnnie Walker Scotch whisky, Smirnoff vodka and
Captain Morgan rum--Diageo's three biggest brands--posted global
declines in the six months ended Dec. 31. Scotch, which makes up
more than a quarter of Diageo's total sales, fell 6%. The company
said challenging conditions in China were partly to blame.
In North America, by some distance Diageo's biggest and most
profitable region, sales declined 2% in the period.
Chief Executive Ivan Menezes, in an interview with The Wall
Street Journal, said demand for Diageo's brands among middle- and
lower-income Americans had yet to rebound, despite signs of the
economy improving.
"I'm cautious, I don't want to call it yet," he said of a
recovery in U.S. spending. "When spending in everyday bars and on
casual dining increases, then you will see the whole industry
getting a bump."
Diageo, the world's biggest liquor company by sales, flagged a
slowdown in the U.S. spirits industry just before Christmas and has
admitted Smirnoff has struggled in the past year. The brand makes
up around 25% of Diageo's $5.22 billion in annual North American
sales but has been hit by price competition and signs that
Americans are falling out of love with flavored vodka.
Chief Financial Officer Deirdre Mahlan said some former vodka
drinkers were now choosing bourbon whiskey instead. Diageo has
invested heavily in expanding Bulleit, its one major bourbon brand,
and sales are expected to top a million 9-liter cases in 2015. But
that is still dwarfed by Beam Suntory Inc.'s Jim Beam, which sells
nearly seven million cases a year.
Mr. Menezes said Diageo intends to keep increasing Bulleit's
sales but "not feed it and act like it's a big brand. We want it to
stay the hipster's choice."
Overall, Diageo said first-half net profit decreased 18% to
GBP1.31 billion ($1.97 billion), compared with GBP1.60 billion in
the year-ago period. Revenue was about flat at GBP5.9 billion. As
in previous periods, Diageo said currency devaluations in emerging
markets ate into sales.
Nevertheless, Diageo said the fiscal second quarter's results
improved on those of the first quarter, which cheered investors.
The company's shares were up 3% to 2,022 pence in midday London
trading.
Mr. Menezes is in the middle of a cost-cutting program designed
to save GBP200 million a year.
The main focus is areas such as logistics, information
technology and supply-chain management, but the company appears to
have targeted other budgets as well. Diageo's first-half marketing
spending fell 1% to GBP896 million, drawing criticism from some
analysts.
"Diageo has underinvested in its brands over a number of years
and needs a prolonged period of investment to restore brand
equity," said James Edwardes Jones, an analyst at RBC Capital
Markets.
Write to Peter Evans at peter.evans@wsj.com
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