A spirited defence

"How can I be sure, In a world, that's constantly changin'?"​

For female readers of a certain age - and who knows, perhaps even a few male ones - the lyrics to teen idol David Cassidy's 1972 hit single How Can I Be Sure?​ will be all-too familiar.

But never mind middle-aged fans of the early Seventies pop icon; Diageo chief executive Paul Walsh may well have been humming Cassidy's tune last week as he went about the job of presenting the group's annual results.

While reported operating profits of £2.6bn - up 13 per cent, boosted by foreign exchange translations, acquisitions and a programme of cost-cutting - represented a "resilient performance", the 2009 fiscal year had nevertheless been a hugely challenging one, Walsh said.

Contrasting forecast

The current financial year would be no less challenging, he added. Uncertainty surrounded the timing, pace and sustainability of economic recovery around the world. How could anyone be sure, in other words?

As if to cement the point, in a statement that sent a shiver through the City, Walsh suggested that the group would deliver "low single-digit organic operating profit growth", a forecast which contrasted with what the company had said at the half-year stage in February, when it believed it would deliver growth "in the range of four to six per cent".

The topsy-turvy world in which we now lived was to blame, it seemed. "There is a lot of uncertainty in the world's markets, but we've the diversity to offset problems," Walsh said. "However, if there was a global meltdown further down the road we would have to revisit our forecasts."

The haziness of the latest estimate caused the Square Mile to panic and send Diageo's shares tumbling. But Walsh stuck to his guns concerning the need for the group to remain competitive in a turbulent market.

While a laudable enough goal for many, it has made the Oldham-born 54-year-old decidedly unpopular North of the Border. Diageo's plan to shut down the Johnnie Walker bottling plant in Kilmarnock as part of a multi-million pound cost-cutting programme has raised the hackles of trade unions and local politicians, who fear the impact of losing more than 700 jobs in the town. Walsh is seen as the man wielding the hatchet.

Difficult decisions

Yet protest marches and widespread media coverage have not dented his determination to follow through with the proposals, which include shutting the Port Dundas plant in Glasgow.

He was unequivocal when it was suggested Diageo might be tempted to accept taxpayer's money to persuade the group to stay put in Kilmarnock.

"We don't want government money. We do not want to compromise our competitive edge and risk the future of the remaining 4,000 of our staff who work in Scotland," he said. Kilmarnock doesn't work, seemed to be the message.

Walsh said he empathised with those affected by the proposed closures, a decision the group "agonised over" for more than a year. But the drive to be competitive in emerging markets where Scotch would play a leading role meant there could be no shying away from difficult decisions.

Geographically, of Diageo's four regions Europe suffered the most in the year to the end of June 2009, with net sales down five per cent.

Economic conditions in Spain and Ireland deteriorated "significantly", although the UK's beer declines were below industry levels.

De-stocking was a factor in sales declines across several of Diageo's markets, but Walsh was unapologetic about the decision to cease to offer credit to certain customers, pointing out the group was "not a bank".

"We decided to take the pain on sales instead," Walsh said, pointing to territories such as Spain, where de-stocking was prevalent and sales inevitably slid.

Premium brands

Meanwhile, with other consumer-led businesses taking the 'value product' route to hang on to strapped consumers, Walsh said Diageo wanted to continue to push its premium brands, with premium being something in the region of $10 a bottle.

However, the group acknowledged that its 'super premium' products would inevitably take a short-term hit. Packaging premium brands in smaller sizes would enable hard-pressed consumers to continue their "emotional attachment" to such products.

Clearly some of Diageo's markets are likely to emerge, blinking and slightly dazed, from the recession sooner than others. Already the group says it is seeing some signs of recovery in the Far East. Europe is another kettle of fish.

Walsh is convinced the controversial restructuring programme, together with new products and an ongoing commitment to marketing spending will position Diageo, which is celebrating 250 years of Guinness this year, to not only ride out the current storm but be better placed when the winds subside.

There is an element of "well he would say that, wouldn't he?" to all this. Ask the boss of any multi-billion pound business whether he thinks his company's business model is viable and he will like as not answer in the affirmative, as Walsh did in resounding fashion last week.

The even money is on him succeeding in the longer term. But painless it certainly won't be…

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Diageo annual results - reported figures in the year to June 30, 2009

Turnover £12.3bn (up 15.4 per cent)

Gross profit £3.9bn (up 19.7 per cent)

Operating profit £2.44bn (up 9.7 per cent)

Pre-tax profit £2.0bn (down 3.7 per cent)

Earnings per share 65.2p (up 9.9 per cent)