Comment: Diageo issues a sobering reminder

14th Oct 2009 18:49

Diageo's trading update today should serve as a warning to those who have become intoxicated by the soaring share prices seen in the past six months or so. While many companies have been witnessing green shoots or at least a stabilisation in the decline, the firm behind Smirnoff vodka and Guinness said today that sales in the three months to September were down by 6% from the same period last year.Analysts had expected a decline given that the previous period immediately preceded the crash that engulfed the global economy last year, but had a fall of about 3% in mind.Today's statement was short on detail but Diageo said that consumer trends remained unchanged across the company's markets and that customers have not been re-stocking, having allowed supplies to dwindle in expectation of continued weak demand.In North America, which accounts for more than a third of the company's sales, stocks have even fallen since the end of June. This may tell a different story to that outlined by Diageo in August when, in its full-year results, the firm said that the global economy appeared to be stabilising.It said then that in Europe, where trading was challenging due to weakness in markets such as Spain and Ireland, the UK was a bright spot. This was largely down to strong sales of Blossom Hill wine although the firm pointed out that Smirnoff sales were declining due to the impact of rival vodka promotions, signalling that consumers here are watching the pennies too.The firm also reported a shift from pub sales to lower margin off-license sales, a trend the broker Killik believes is continuing and one that was reported last week by C&C, the company that makes Magners cider.SABMiller, which sells beers such as Grolsch and Miller Genuine Draft, reported similarly subdued trends when it last updated the market at the end of July and investors will be keen to see what the firm has to say when it issues a trading update on Thursday. The run-up to Christmas will obviously be a crucial period for drinks firms and could kick-start a broader recovery, but it is worth remembering that the euphoria seen in equity markets recently has not been reflected in most economic news or in many company results and updates.In the UK and other markets, unemployment is still rising, making it difficult to envisage a strong rebound in consumer confidence any time soon. There are also continuing worries over inflation levels, salaries, house prices and various other indicators. In the current environment, drinkers look set to stay at home with their cheap bottles of vodka for some time yet.