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30 April 1998
Interim results for 6 months to 28 February 1998
CHIEF EXECUTIVE'S REVIEW
Operating strategies in both spirits and retailing are based on the development of our principal brands in their main markets, improving standards of customer service and achieving year by year gains in operating efficiency.
In the half year on which we are reporting, marketing expenditure at constant currencies was 3% higher and we increased investment behind our priority spirits brand market combinations substantially. Similarly, in UK pubs 85% of capital expenditure was devoted to the development of our brands.
In general, spirits and retailing sales volumes have continued the positive trends seen last year. USA spirits volumes have been affected by some contraction of stocks held by retailers and distributors but second half results so far show a resumption of growth. In UK pubs and USA franchising, sales per pub and store continue their rising trend.
In Asia the economic crisis has affected trading in both sectors of the business and has eroded performance gains made in Spirits & Wine in the early part of the year. We expect a further adverse profits impact on full year results from the region.
Our principal focus in both spirits and retailing remains on achieving organic growth and thereby raising returns on investment. We give active consideration to acquisition opportunities, such as Dewar's Scotch whisky, but they must be achievable on terms which will add value. In the case of Dewar's, conflicts with our existing brand portfolio combined with our assessment of the brand's potential led us to conclude that, at the sale price, acquisition would not have been value enhancing.
Both sectors of the business have achieved real growth on a comparable basis, after adjusting for the effects of currency translation and the additional pension charges resulting from changes to the Advanced Corporation Tax regime. We expect further gains as the benefits of the policies we have implemented flow through and there is still much to go for in improving our business.
SPIRITS & WINE
- 10% increase in underlying trading profits
- Top 4 brands - Ballantine's, Beefeater, Kahlua, Sauza - grow by 2% in total
- Strong brand performance in Europe
- Kahlua volumes lower in USA due to destocking
- Price increases remain at +1% / +2%
Reported trading profits, compared with the first half of last year, were level at £239 million. At constant exchange rates, Spirits & Wine underlying turnover was 1% higher than the first half of last year. On the same basis trading profit was 9% ahead but excluding increased pension charges of £3 million, the increase was 10%.
Markets
(Volume figures are third party sales)
Overall Spirits & Wine volumes were level with those of the first half of last year. The regional and category trends were as follows:
| Europe |
+5% |
Whisky |
0 |
| Americas |
-4% |
Brandy |
-6% |
| Other |
-2% |
Liqueurs |
-3% |
| Total |
0 |
White spirits |
+6% |
Scotch whisky volumes were 2% ahead.
In Europe volumes increased in Spain, the UK and France but were lower in Germany. Strong growth in the countries of the former Yugoslavia, Russia and Bulgaria contributed to a 16% volume increase in Eastern Europe as a whole.
In the USA volumes were affected by reductions of stocks in the supply chain. In Mexico tequila volumes increased but brandy sales were adversely affected by weak consumer spending trends and competition from illegal bottlers. Second half trends will be affected by the January 33% increase in spirits tax.
Overall Asian volumes increased, principally as a result of higher sales to Japan. Duty free sales in the region were affected by reduced traffic however.
Brands
Ballantine's in Europe increased volumes by 5%, led by strong growth in Spain, France and Italy which more than offset falls in Germany and Greece. Reductions in duty free meant that the overall brand volumes were level.
Beefeater volumes increased by 1% with further growth in Spain.
Kahlua volumes were 7% lower despite the continued growth of premixed versions but volumes in the USA - the brand's principal market - are now stabilising. Consumer data indicates that enhanced marketing activity in the USA is having a favourable impact resulting in underlying growth for the brand and, early in the second half, sales from distributors into the retail trade were increasing again.
Sauza, rated the world's fastest growing spirits brand, registered another strong increase, up by 16% with gains both in the USA, where the premium varieties are growing rapidly, and in Mexico.
Canadian Club and Courvoisier sales in the USA were lower but Maker's Mark again increased volumes. Following reductions in the first half, USA core brand volumes are increasing in the second half.
Amongst the major local brands DYC Spanish whisky volumes were level but there were reductions for Presidente, Don Pedro and Centenario. Tia Maria volumes in the UK, where the brand has been strongly promoted by advertising, are up 17%.
Pricing
Prices continue to increase at 1% - 2% overall.
Marketing
Total direct brand marketing expenditure increased by 3% at level exchange rates to £168 million.
Costs
Employee numbers in the continuing businesses were reduced by 3% during the first half year and operational efficiency gains generally are more than offsetting cost inflation. There will be further productivity improvements in Scotland as the result of a ground breaking two year performance related pay agreement reached with the two main unions.
RETAILING
- 4% increase in underlying trading profits despite impact of Asia
- Managed pub profits up 6% overall; profit per pub up 10%; food take per pub up 17%
- USA franchising profits 13% ahead led by Dunkin' Donuts where same store sales growth was 11%
- Good competitive performance by leased pubs and Victoria Wine but international franchising is impacted by Asian economic problems
Reported trading profits, compared with the first half of last year, were £2 million lower at £126 million. Retailing underlying trading profit was 4% ahead at constant exchange rates and excluding increased pension charges.
Pubs
Managed pub profits increased by 6%, before higher pension charges, despite a 3% reduction in average pub numbers.
Capital expenditure was again concentrated behind the lead pub brands: Big Steak Pub with Wacky Warehouse, Firkin and Mr.Q's, and pub brands in aggregate now account for 45% of the outlet total. Capital spending in pubs includes an increased proportion of acquisitions, as opposed to refurbishments, and, with most acquisitions due to be completed in the second half, the level of spend was down in the first half.
Sales growth has been lower since Christmas but the overall trends remain positive. Total turnover per pub increased by 6% led by food - up 17% - and machine income which increased by 11%. Drink take per pub increased by 3%.
Mr.Q's and Big Steak Pub / Wacky Warehouse were the strongest performing brands but sales through the Firkin pubs were affected by the weight of competitive spend on High Street pubs. Returns on investment, although lower than previously, remain well above the cost of capital.
Tied leased pubs have maintained profits despite a 7% reduction in average numbers as selective disposals continue. Profits per pub increased by 8%.
Benefits from improved beer supply terms were in line with last year's supply provision benefits at £23 million.
Second half profits will benefit from a number of factors including: a higher proportion of new pub openings, more than double the total in the corresponding period of 1997; the ability to offer a greater range of popular beers in our pubs as a result of more flexible supply agreements; the absence of a beer price increase from Carlsberg-Tetley (the annual increase date being December rather than June); and overhead cost reductions.
Franchising
Profits from USA Foodservice businesses were ahead by 13%, although overall profits worldwide showed a reduction of £1 million at constant exchange rates due in the main to the problems caused by the economic crisis in Asia.
In the USA, Dunkin' Donuts same store sales growth was up by 11% reflecting the benefits of new product development and continued marketing activity. Same store sales growth for Baskin-Robbins was 4% ahead but our margins were affected by a switch in the sales mix from ice cream to beverages. Togo's same store sales also increased by 4% and integration of the brand into the USA business is on schedule.
Store numbers were 6% higher, including the Togo's acquisition, compared with the first half of 1997, and system wide sales overall increased by 14% or 20% including Togo's.
Outside the USA, store numbers and sales increased but deteriorating economic conditions in Asia were the principal cause of a £4 million adverse swing in profits, including currency effect, in the half year. Recovery is likely to be very gradual and further losses are therefore expected in the second half.
Victoria Wine
Profits increased by £1 million to £7 million and an improved sales mix contributed to increased gross margins. Wine sales were 12% ahead of last year but tobacco and spirits sales largely reflected the market decline and were 4% and 6% lower respectively.
Victoria Wine increased its liquor market share and developments such as the first Martha's Vineyard drinks supermarket and petrol forecourt retailing have made an encouraging start.
OTHER INTERESTS
Trading profits from other interests including the Panrico joint venture in Spain and the 25% interest in Britannia Soft Drinks were £7 million (last year £5 million).
Tony Hales
30 April 1998
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