By Al Edwards, Business Co-ordinatorDesnoes and Geddes, (D&G) a subsidiary of Diageo, and the country's leading brewed beverage company, has seen a decline in volumes of most of the more popular brands and is now looking to its export market to generate growth in sales.
Last year the company recorded an economic profit of $425 million with dividends decreasing by 10 per cent due to an increase in Special Consumption Tax (SCT). Economic profit is the net profit remaining after deducting a capital charge for the use of net operating assets from net operating profit after tax.
SHARE VALUE
Return on equity continues to be at 30 per cent and the share value has increased over last year.
For the first half of the year volume growth in the domestic market performed better than in the second half, with a 9 per cent growth and a 4 per cent decline in the second half of the year. "This is not surprising given a 45 per cent increase in SCT which lead to our second price increase in a year. As you are well aware, consumer spending power is under threat but despite this, it was a good performance to come out with a three per cent increase in growth overall. Fortunately, our export growth was strong in the second half of the year," said D&G's Finance Director, Lisa Nichols, earlier this week at the company's Investors and Analysts' Forum held at the company's headquarters located on Spanish Town Road, Kingston.
Over the last five years there has been steady growth in volumes up to last year with exports accounting for 18 per cent of volumes. Turnover increased as well as profit after tax which grew by ten per cent, year on year.
INITIAL ANALYSIS
An initial analysis of the first quarter results for this year reveals volumes declining in the domestic market with Smirnoff Ice declining by 39 per cent. This is not surprising given the prevailing economic climate. However, turnover has increased by 18 per cent but the rise in SCT is now kicking in. The sum of $48 million was spent in the first quarter in marketing Red Stripe in the United States. In real terms, profit before tax has grown by 18 per cent not the 3 per cent shown in official figures, said Miss Nichols.
The tough business climate has hurt all brands with only Malta and Dragon (non-alcoholic) registering growth. Sales in the United States are expected to increase by 20 per cent in the first quarter. Looking forward to the rest of the year, there will certainly be challenges facing D&G's growth, namely the economy, devaluation the knock on impact of inflation, the impact on disposable income and consumers already cannot buy as much beer as they used to.
How will Red Stripe respond to these challenges?
The company will continue to increase its marketing investments. Last year total marketing investments increased by $363 million (111 per cent) to $690 million with the amount spent on the domestic portfolio increasing by $202 million (62 per cent). "Efficient and effective marketing continues to be essential to our success. Red Stripe is a brand building company. We spent more on advertising and promotions on Smirnoff Ice than we did on our beer product," said the acting president Justus Visser.
GROWTH STRATEGY
Investments behind the Red Stripe growth strategy in the United States, its biggest export market, amounted to $161 million. The strategy for the United States market is to become one of the fastest growing super premium brands in the industry and to that end D&G will be looking to grow turnover from US$14 million to US$40 million by financial year 2008. Red stripe will be targeting 15 media markets in the United States and is looking to become a Top 15 imported brand within the North American beer market by financial year 2008. These areas will be in warmer climates where Red Stripe beer sales are likely to do well. Miss Nichols said that D&G will not be dramatically increasing its marketing spend overall this financial year, instead it will be focusing on direct volume driving activities. The first example of this is its Christmas promotions activities which will cost over $200 million.
The aim for this financial year is to drive volumes, cut costs and to continue to develop new products and look for new opportunities. Red Stripe have plans to launch draught beer which will be initially available mainly in hotels. D&G is placing a strong emphasis on corporate governance which will be spearheaded by Noel daCosta. Red Stripe has invested $1 billion in its Mag 5 bottling plant which it says has transformed its supply capabilities. Mag 5, the company says, has helped to drive profit before tax growth of 33 per cent.
