Diageo sees higher rise in costs for next year

By David Jones

LONDON (Reuters) - Britain's Diageo Plc (DGE.L: Quote, Profile, Research), the world's biggest alcoholic drinks group, warned on Tuesday that its costs will rise faster in its next financial year compared with its current year due mainly to increases in energy and grain costs.

The London-based group said its input costs will rise by 3 percent or around 90 million pounds ($175 million) in its current year to the end of June 2008, but the rise would be higher in its following year to end-June 2009.

"Next year's rise will be above 90 million pounds, but we hope to mitigate this rise by a number of measures," said Diageo's managing director for global supply and global procurement David Gosnell on the sidelines of a briefing.

Gosnell said the group hopes to reduce the impact of this rise by greater efficiencies in its operations, such as its bottling plants, reducing the level of its inventory stocks and better procurement of its key inputs.

Diageo which makes Smirnoff vodka, Johnnie Walker whisky and Guinness beer, has seen the biggest commodity price rises from European natural gas, grains such as wheat, barley and corn, and also crude oil. It expects many of these commodity prices to be "challenging" in its 2008/2009 financial year.

Diageo's shares dipped as low as 10.24 pounds after the warning and ended down 1.5 percent at 10.31 pounds in a slightly lower London stock market with the FTSE 100 .FTSE ending off 0.1 percent.

Analysts said that while Diageo was not immune to higher raw material prices it was cutting costs and looking to push up its own prices to help offset these rises in input prices.

Gosnell told the group's supply seminar that Diageo's cost of goods, or cost base, had risen just 0.7 percent to around 3 billion pounds in its year to end-June 2007, but had jumped 2.7 percent in the current year's first-half to end-December 2007.