Allied munches into Europe

City is yet to be convinced the strategy switch will work for the drinks and catering giant

ALLIED DOMECQ, the drinks and catering conglomerate, has taken another small step in its global masterplan with a deal that will expand its Baskin-Robbins ice-cream parlours and Dunkin' Donuts coffee and bakery shops into Poland, Slovakia and the Czech Republic.

"Our intention is to further develop both Dunkin' Donuts and Baskin-Robbins as truly global brands," said Stephen Alexander, Allied's retailing chief, "and this agreement represents a major step toward that goal."

Allied is building a £20m ice-cream plant in Moscow and has 30 per cent of Eastern Europe's fledgling premium spirits market.

These expansions are part of an ambitious double switch, which has put the shares under a cloud for the past 15 months because many investors have yet to be convinced Allied is heading in the right direction.

Under the ambitious leadership of Tony Hales, the group is unloading the old Lyons food and beverage businesses to concentrate on wines, spirits and catering - which are in turn being spread over a global network that already extends from Spain to China and the Americas.

The first part of the exercise has gone well. As the Independent on Sunday first highlighted two weeks ago, Allied is poised to sell its Tetley tea operation to a management team for around £400m, having previously sold the Lyons patisseries, biscuits and cakes business.

Meanwhile, moves are afoot to sell Allied's 50 per cent stake in Carlsberg- Tetley, possibly to Whitbread. This would be a historic deal, for it would mark Allied's departure from UK brewing - its original business - and show how the marketing-led Mr Hales is transforming the group's philosophy.

That will still leave its Ansells, Ind Coope and Tetley pubs. These are being deserted by drinkers who prefer to consume canned draught bitter in the comfort of their living-rooms - often at a fraction of the price. Allied, like its rivals, is having to spend on a "pub brand development programme" to address the problem. While this will further erode profit margins in the short term, it has the potential to offer customers a higher- value package. The price, eventually, is that it could radically alter the character of the pubs, as they are turned into family entertainment centres with the emphasis on light eating rather than heavy drinking.

The global expansion plan took an important step forward in April last year, when Allied bought the Spain-based Pedro Domecq drinks business for £739m, making the group the world's second-largest spirits producer after Grand Metropolitan and giving it a substantial Mexican foothold to complement its acquisition of Canada's Hiram Walker in 1986. This deal was regarded as so important that it prompted the group to change its name from Allied-Lyons to Allied Domecq.

However, the celebrations were short-lived. The devaluation of the Mexican peso in December sent analysts rushing to downgrade their forecasts for Allied - not so much for the year that ended in February as for the the current year. The peso crisis and lower volumes, will affect Mexican profits - around 10 per cent of the group's total - in the next 12 months.

That leaves Mr Hales looking to the long-term benefits of the Domecq tie-up. It consolidates Allied's access not only to Mexico, where it produces the world's largest-selling brandy, Presidente, but also other emerging markets in Latin America and the Hispanic communities of the United States, where loyalty to Mexican and Spanish consumer products is strong.

The potential for Allied is considerable, despite the region's political, economic and social problems. Consumer confidence in Mexico is low while inflation and interest rates are high. The key lies in American support for the Mexican economy and US influence elsewhere in Latin America. No US administration can afford to let those countries go down the pan - or so Mr Hales must hope.

In Asia, Allied is not short of commitment, but it lags behind Guinness in business relationships and distribution net works. But Allied is catching up. It has outposts in Japan, Singapore, Malaysia, Hong Kong, Thailand, and Australasia, and established its first joint venture in mainland China in February.

In the more mature European markets, Allied faces intense pressure from own-brand producers, and there will be a hard battle to secure market share. With this in mind, Allied is to launch an aggressive marketing campaign in the coming year. That is likely to be expensive: Grand Met spent £901m on advertising last year - nearly as much as its pre-tax profits over the same period.

"Only brand-building and innovative marketing will combat own label or mass discounters," said David Scotland, president of Allied's European division.

These conflicting influences make it difficult for investors to judge whether Allied's pint pot is half-full or half-empty - and why the shares carry a prospective yield of 5.5 per cent. That provides an attractive income cushion until the global strategy starts to prove itself. Meanwhile, the shares may flounder.

Activities

Brewing (Carlsberg-Tetley), wine and spirits (Ballentine's, Teacher's, Canadian Club, Burroughs, Cockburns, Courvoisier, Harveys of Bristol), retailing (Ansells, Ind Coope, Taylor Walker, Tetley pubs, Baskin-Robbins ice-cream, Dunkin' Donuts, Victoria Wine shops).

Share price 537p

Prospective yield 5.5%

Prospective price-earnings ratio 13.4

Dividend cover 1.7 1992-3 1993-4 1994-5*

Turnover £5.3bn £5.5bn £6.2bn

Pre-tax profit £505m) £606m £700m

Net profit £260m) £325m £420m

Earnings per share 28.9p) 36p 40p

Dividend per share 21p 22.2p 23.5p (* forecast)