Business Irish

Tuesday 20 February 2018

Guinness's glory days are gone, but firm in stout form

ONE of the great cultural regrets of the 20th Century was the dilution and blurring of the extraordinary brand name, Guinness, in the international marketplace.

The submerging of the brand into the Diageo logo may have had some logic from an office block in London, but I always thought it unfortunate. In its heyday, Guinness allowed Dublin to boast of having the biggest brewery in the world. Before World War One, the Guinness group accounted for the bulk of industrial output, not to mention exports. Outside the Lagan Valley it was the mainstay of industrial production in this country in the years when Ireland was a lot poorer than now. "Iconic" does not begin to do justice to Guinness in an Irish context, and a short walk in any direction in Dublin offers evidence of the company's mostly benign Irish legacy.

If it was possible to climb into one of those De Lorean cars and speed back to the 1970s and contrive a future for the Guinness group before Ernest Saunders got his grip on the company, so many wonderful opportunities might have been possible.

As things stand, Guinness is now an important but not dominant part of Diageo. The company has a worldwide reach that makes it one of those this column loves to study and analyse and from which some very useful gains can be made.

Diageo got its puzzling name (dias, Latin for day, geo, Greek for world) when Guinness and Grand Metropolitan merged in 1997. Rationalised leaders in the Scotch whisky distilling business were incorporated into the group, and it has evolved into a broad-based drinks giant. The merger with Grand Met gave it many more international brands, many of them the top sellers in their categories.

The group currently has Johnnie Walker, Smirnoff, Baileys, Guinness, Captain Morgan, Tanqueray, J&B, Bushmills, Crown Royal (Canadian), Gordon's and an assortment of smaller brands. It sells its vast portfolio of products in 180 countries, with North America counting for 34pc of sales, Europe 26pc, Asia 12pc and the rest of the world 28pc.

The company is attractive for investors in that it has phenomenal scale (market capitalisation £45bn/ €53.6bn). It is the ninth biggest company on the FTSE 100 quoted in both London and New York. Its strategy of concentrating on 14 major brands appears to be working.

There is a certain sentimentality and nostalgia to be detected when I write about Guinness, and I reckon I am no different from anyone who lived in Dublin at a time when the name was synonymous with the most generous paternalism and admirable treatment of its workforce.

Unfortunately, these are the virtues of the past, and by the time Grand Met and Guinness were merged and were trading as Diageo, things were a lot more hard-nosed.

After 1997 the huge food division of Grand Met was offloaded; Pillsbury to General Mills in 2000 and Burger King to Texas Pacific in 2000 for $1.5bn (€1.12bn).

The decision was made that Diageo would concentrate on the drinks industry. Paul Walsh was appointed managing director of Diageo in 2000. He has expanded the company by acquisitions and partnerships.

In 2000 he acquired Seagram's spirits business. In 2011 he acquired Turkish company May Icki for $2.1bn (€1.58bn). The company has also invested in United Spirits Limited, which was the leading spirits company in India in the last year.

That is in addition to its 34pc shareholding in Moet Hennessy. The one disappointment in recent times is the loss of its agreement with Jose Cuervo, the Mexican tequila distiller.

In investment terms, Diageo shares have increased significantly in the past three years. Last year alone they rose by 30pc; net sales are at £11bn (€13bn), up from £10bn (€12bn) in 2011. The price-to-earnings ratio is at 24 and the dividend yield is 2.7pc with the share price hovering at £18 (€21.45) per share.

The loss of Cuervo could be seen as a setback. However, Beam (owner of Cooley Distillery), the American spirits company, is always an option. All in all, it's a long way from the "Guinness is good for you" days.

Dr John Lynch is a former chairman of CIE. Nothing in this section should be taken as a recommendation, implicit or explicit, to buy or sell any of the shares mentioned.

Irish Independent

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