LONDON (Reuters) - Growth of over 10 percent in Russia and Turkey will help Diageo (DGE.L) offset tough trading in problem euro zone markets as the world’s largest spirits group makes contingency plans for a break-up of the currency bloc.
The London-based maker of Johnnie Walker whisky and Smirnoff vodka bought Turkish firm Mey Icki in August to double to 20 percent the share of its European sales coming from fast-growing emerging markets such as Russia, eastern Europe and Turkey.
Diageo’s Europe chief Andrew Morgan sees these markets continuing to grow in double-digit percentages, helping to offset the troubled markets of Greece, Italy, Iberia and Ireland and so expects to see his European region soon back in growth.
“Barring some external factors, such as the break-up of the euro, we will see improving trends in Europe, and over time — such as 2-3 years — we want to be in growth,” he said.
Morgan said it was prudent to plan for a possible break-up of the euro zone, which could lead to massive devaluations, making Diageo’s imported spirit brands more expensive.
“We have started thinking through what a break-up of the euro may look like,” Morgan said, without elaborating.
He said European trading trends should improve this year from the underlying sales fall of 3 percent seen in its last financial year to June 2011, helped by the emerging markets of Turkey and Russia, and solid performances from mature markets like Germany and Britain.
Diageo shares were up 2 percent at 1,355 pence by 2:10 p.m. in a London stock market ahead 2.9 percent.
Europe accounts for 26 percent of Diageo’s worldwide profits, but within the region around 35 percent of earnings come from Greece, Italy, Spain, Portugal and Ireland.
Morgan was confident that Diageo can mitigate the effect of more austerity measures in Greece and Italy, while the Spanish spirits market is seen declining by a high single digit percentage in line with current consumption levels.
Underlying sales in Greece collapsed 38 percent and those in Iberia by 18 percent in Diageo’s year to June 2011, while Russia grew 21 percent in a difficult year for Diageo with its European annual profit down 23 percent.
Morgan says the group no longer has a big business in Greece and Diageo never had a big business in Italy with each nation only accounting for around 5 percent of Diageo’s European sales.
The current year has started better with first quarter July-September European underlying sales up 6 percent, with 10 percent growth in markets such as Russia, eastern Europe and Spain. But Morgan cautioned against extrapolating that rise for the year due to a number of one-off impacts like the big destocking in Spain in the previous year.
For graphics on the drinks industry: r.reuters.com/xym35s
Morgan added that growth for the future will be boosted by Mey Icki which is a high growth and high margin business with a wide distribution network since it was a Turkish state monopoly only seven years ago. Its sales were up 15 percent in 2010 at 766 million Turkish lira (265.7 million pounds)
“Growth is accelerating. We saw double digit growth this calendar year and double digit growth since the acquisition and we see no reason that this growth will slow,” Morgan said.
This growth came despite a 23 percent rise in Turkish excise tax in October.
Mey Icki controls nearly 80 percent of Turkey’s spirit market which has seen annual volumes rising by 4 percent over the last five years, helped by strong economic growth in Turkey — up 10.2 percent in the first half of 2011.
The group makes 78 percent of its annual sales from raki, a traditional Turkish spirit made from grape alcohol distilled with aniseed, and 11 percent from vodka. It has a 84 percent market share of the raki market and 62 percent for vodka.
Morgan said the 1.3 billion pound Mey Icki acquisition was part of Diageo’s strategy to get 50 percent of its sales from emerging markets by 2015 from around 35 percent currently, and it had long eyed Turkey as a good market for scotch whisky with its J&B brand being the current best seller.
“Scotch is really exciting, J&B and Johnnie Walker lead the category while there is Smirnoff and Bailey’s (liqueur). These will be the four leading brands for us in Turkey,” Morgan added.
Reporting by David Jones; Editing by Clara Ferreira-Marques and David Cowell