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Liquor Maker Deals With Crisis Hangover

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DIAGEO PLC, the world’s largest liquor manufacturer, will see a ”long and slow” recovery from recession in its biggest markets, and plans to compensate by expanding in emerging economies, says its chief executive, Paul Walsh.

The US and Europe would take more time than Asia to rebound, Mr Walsh, 54, said in an interview at Diageo’s London offices. Countries such as Mexico and Brazil have been ”almost business as usual” through the slowdown, while China had had a ”sharp, V-shaped recovery” as a result of the country’s $586 billion stimulus package.

”I’ve been in this business 27 years and never seen anything like it – we just saw the brakes go on in November,” Mr Walsh said. ”There’s been gradual improvement since April, but it’s not a snap-back” to pre-crisis growth levels, he said.

Diageo saw sales growth stall in the US toward the end of last year as distributors stopped ordering and depleted inventories, while consumption faltered in European markets from Spain to Ireland.

Mr Walsh plans to expand in Latin America, Asia and Africa to guard against any future slowdown. In 10 years Diageo’s revenue from those regions will represent a ”much bigger” percentage of the total. The US and Europe now account for about two-thirds of net sales.

One of the main lessons he had learnt from the recession was the crippling effect of de-stocking, as retailers’ practice of reducing inventory is known. ”We didn’t have enough visibility of the inventory,” Mr Walsh said. ”In the future we’ll work closer with distributors to understand depletions better.”

Diageo’s competitors Pernod-Ricard SA, Brown-Forman Corporation, Laurent- Perrier SA, Remy Cointreau SA and LVMH Moet Hennessy Louis Vuitton SA have all said sales were hurt earlier this year as US retailers ran down inventory during the recession.

Mr Walsh said the Thanksgiving and Christmas holidays would be ”critical” indicators of whether US consumers were prepared to buy more of Diageo’s more expensive brands such as Johnnie Walker whisky and Baileys liqueur.

LVMH said last month that demand for cognac improved ”significantly” as wholesalers began to replenish their inventories, echoing comments from Remy Cointreau.

Diageo was implementing inventory management practices globally to ensure it has better knowledge of what is being held by third parties, Mr Walsh said.

Consumer spending, which has strengthened this year as interest rates have declined along with food and petrol prices, may be affected should governments raise taxes to reduce borrowing, he said.

Britain had the biggest budget deficit for any September since records began in 1993, figures have showed, while in the US, the deficit reached a record $1.4 trillion in the year ended September 30.

”How governments solve their deficit problems will be crucial,” Mr Walsh said. ”Any increase in corporate or personal tax would squeeze disposable income.”

The maker of Guinness stout had seen a change in the way marketing and advertising were perceived, consumers being more likely to respond to messages about a product’s quality and heritage, rather than a superficial ad campaign, Mr Walsh said.

Diageo’s new online campaign for the Smirnoff vodka brand, its top-seller, focuses on the story of the founder Piotr Smirnov and his son Vladimir, who fled Moscow for Paris after the Russian Revolution, having escaped death by firing squad. Guinness advertising this year has focused on the stout’s 250th anniversary.

”Bling has gone, consumers’ views have changed,” Mr Walsh said. ”People will still pay for quality, but ostentatious consumption is gone.” To reflect the change, Diageo has shifted its advertising focus to ”play up the legitimate quality credentials of brands, with more talk about authenticity”.

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Tuesday, August 22, 2:59 pm

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