Question time for Diageo chief after failed tequila talks
DIAGEO chief executive Paul Walsh will this week face a fresh grilling over his decision to abort talks to buy tequila brand Cuervo.
Walsh will hope that strong trading in the US and emerging markets will help draw a line under the decision, but he will still face questions about his plans for the category.
The City expects a surge in sales volumes in Asia, Latin America and the US in the first half of the group’s financial year to have offset a continuing tough European market for the world’s biggest spirits business. Analysts are predicting a modest rise in sales to about £6 billion, giving a 9 per cer cent jump in underlying earnings to over £2bn.
Santander’s broking division said it expected Diageo, whose flagship Scotch is Johnnie Walker, to show a “solid” trading performance and “begin shaking off the disappointment of the loss of Cuervo”.
Walsh walked away last month from talks to buy or take a stake in Cuervo, the world’s biggest selling tequila, after failing to agree a price with the owners, the Beckmann family.
The British group’s deal to distribute the product outside Mexico will also stop in June, leaving it without a tequila in its stable of drinks, which includes Guinness, J&B whisky and Smirnoff vodka.
Elaine Coverley, drinks analyst at Brewin Dolphin, said Walsh would be quizzed on strategic alternatives to Cuervo, including trying to snap up Sauza tequila from the Jim Beam American drinks group.
“The other alternative is Diageo launching its own tequila,” Coverley said. “They have already done it with Ciroc vodka. But the underlying trading picture should be decent. A key point of interest will be whether the fast-growing Latin-American market is continuing to grow well given its importance to the Scotch market.”
Coverley said it was possible that the US market – which accounts for 26 per cent of Diageo’s global sales – would see some pressures “but generally spirits are more resilient than beer and consumer staples there”.
“They are looked on as an occasional treat. Diageo and Pernod also pushed through US price increases before Christmas because of input cost pressures. It would be a concern if this had an adverse knock-on effect on volumes.” Analysts said they would also be looking for an update from Diageo on how the regulatory scrutiny of the group’s recent £1.3bn purchase of a majority stake in Vijay Mallya’s United Spirits group in India is going.
Walsh has said United’s 41 per cent Indian market share would “transform our footprint in India”. The Diageo boss, who announced the deal in November, has played down the likelihood of any enforced disposal to get the deal past regulators, including Mallya’s ownership of the Whyte & Mackay Scotch business in Scotland.