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Whisky sales soar in Asia to boost profits at Diageo

Surging sales of Johnnie Walker whisky in Asia and the Middle East helped Diageo to achieve modest growth in sales and profits, despite facing challenging conditions in the developed markets of Europe and the US.

The blended Scotch was the star performer in Diageo’s stable in the year to June when sales of the whisky increased by 7%, by value. Total sales of all whisky in Diageo’s portfolio, which also includes malts like Lagavulin, increased by 5% during the year.

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The strong performance helped the drinks giant to increase operating profits before exceptionals from £2.6bn to £2.75bn. Sales increased from £9.3bn to £9.8bn. Diageo said it achieved 2% organic growth in sales and profits.

Diageo booked a £93m exceptional charge for restructuring its supply operations, most of which was due to the cuts in the company’s Scottish operations that were announced last July.

The company provoked an outcry when it decided to close its bottling plant in Kilmarnock and a grain distillery in Glasgow with the loss of around 900 jobs. The proposed closures may come under renewed scrutiny in view of the growth of the firm’s whisky operations.

However, a senior executive in Diageo’s European business defended the decision.

Richard Bee, finance director for European supply, said Diageo had acted to ensure the long-term cost competitiveness of its business.

Pressed on whether the closures were necessary in view of the prospect of strong growth in sales of whisky in coming years, he said: “We still had significant excess capacity from a packaging perspective.”

Bee said Diageo has had more than 900 “aspiration conversations” with people who will be affected. The company hopes to minimise the number of compulsory redundancies by giving people the opportunity to transfer to other plants.

It will create around 450 jobs as a result of expanding its packaging facility at Leven in Fife. Diageo is also increasing capacity at the grain distillery at Cameronbridge.

Bee said that Diageo had sanctioned capital investments totalling £500m in Scotland in the last five years, including spending on these facilities.

Both should benefit if Diageo can maintain growth in sales of Scotch. The company is using its huge marketing muscle to promote a portfolio of favoured brands across the world.

Johnnie Walker is one of a number of “global priority brands”, which also includes J&B Scotch, Smirnoff vodka, Captain Morgan rum and Guinness beer.

The company uses its global reach to tailor its offer to suit local markets. For example, it promoted the Harp brand of beer in Nigeria to help compensate for any fall in sales of higher priced Guinness in response to the downturn.

Chief executive Paul Walsh said the strategy had allowed the firm to make good progress against a difficult economic backdrop.

“We have outperformed and delivered share gains across most of our biggest markets,” he said.

“Our performance in the developing markets drove overall growth while markets in North America and Europe remained weak.”

Diageo was a big beneficiary of the continued growth in the economies of countries of the Asia Pacific region during the year. Sales of Johnnie Walker Red Label increased 19% by volume in Australia.

The company was also boosted by resumption of growth in the Middle East and increased air travel.

Sales volumes in the Global Travel and Middle East division rose by 15%.

“The stand-out brand performance was from Johnnie Walker, particularly Black Label where net sales grew 38%,” said Diageo.

Sales of vodka, which are concentrated in mature markets, fell 1% globally.

Diageo said Europe remained a challenging region, impacted by weak consumer confidence and economic uncertainty.

However, the firm did well in Britain, where volumes rose 9% compared with 1% across Europe.

Diageo said it had grown its share of the key off-trade by using promotions.

Volume sales in North America fell by 2%, “mainly driven by lower volume in US spirits”.

Walsh said Diageo could accelerate growth this year. “The global diversity of our business, together with the strength and range of our brands and the agility we have demonstrated gives us confidence that in fiscal 2011 we will be able to improve on the organic operating profit growth we have delivered this year.”

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