Diageo will demonstrate the power of advertising on Thursday when chief executive Paul Walsh is due to confirm a surge in sales of his top brands such as Johnnie Walker, J & B, Smirnoff, Bailey’s and Guinness following a bold decision to step up the promotional spend.

Close followers believe that the group spent a record of nearly £1.1 billion on a major marketing push last year in a bid to spark new interest in its mature brands and the annual results will show it was rewarded with a near 10% jump in total revenues to around £7.25bn.

UK sales of Guinness are believed to have been particularly strong after the quirky “reverse evolution” advertising campaign while some of the best gains were seen following heavy promotional activity at the top end of the US spirits market, despite disruptions caused by last year’s hurricane season.

After stripping out the effects of inflation, underlying sales growth is expected to show an increase to around 7% for the second half of last year compared with a bare 4% achieved in 2005.

The extra sales should see annual profits back comfortably above the £2bn mark after the disappointing £1.93bn reported previously despite an expected £80 million jump in promotional costs, higher interest and energy charges and the effects of a weaker US dollar.

Brokers say the actual results should provide few surprises after the company issued a comprehensive trading update at the end of June, although several are preparing to upgrade forecasts for the current year.

Melissa Earlam at UBS jumped the gun last week to lift her predictions in anticipation of a cheerful update on Thursday.

She now believes earnings could rise 10% in 2007, compared with her previous guidance of 9% growth, and has set a target of 1130p for the shares against a current price of around 945p.

“We believe there is a strong case to be made for the re-rating of Diageo relative to the sector compared to the last five years,” she said.

The analyst warns that there are still a few potential risks and says that the latest terrorist scares had a material impact on Diageo’s duty free sales at airports over the past week or so although it is too early to assess any long-term impact. Duty free is understood to account for up to £350m of the group’s annual sales.

Despite the overall optimism, there will be be a few disappointments tucked away in latest figures, including poor sales of Scotch in Spain and flat Guinness returns from Ireland.

There is also likely to be a sharp decline in Smirnoff Ice and other once-fashionable ready-to-drink alcopops despite the launch of new fruit-based products.

And overall sales in Europe are expected to show a modest slippage, though analysts say that the returns are beginning to improve following a sales push for J&B in France and the resurgence of Guinness in the home market.

In contrast, the group is expected to boast further market share gains in the US after recording 23 months of successive sales increases and will disclose double-digit sales gains in Latin America, Asia and Africa.

Analysts believe that the group could be planning a major initiative to build up sales outside of Europe and North America and there has been strong speculation that directors could announce a new joint venture with the Indian spirits group Radico Khaitan.

Any move could involve plans to develop a new portfolio of local brands that sell alongside the more established brand names.

In Thailand, Diageo is said to have had some spectacular successes through a new range of standard and economy whiskies under names such as Benmore, Golden Knight and Spey Royal and this idea is likely to be rolled out elsewhere.

“Brazil and Russia are obvious target areas and the launch of new local products should keep sales growth bubbling along nicely,” commented one industry source. “But new launches cost money and they could impact on profit margins, as well as taking some business away from the group’s premium brands.”

Diageo employs some 3800 in Scotland, and workers will look for news on the progress of a three-yearly valuation of their pension scheme that had an estimated £653m deficit at the end of last year.

The group has already announced plans to eliminate this by making annual payments of £100m into the scheme in addition to its normal payments of some £50m.

27 August 2006