Diageo to sell Cinzano

Italian vermouth to go in clear-out of underperforming brands

DIAGEO, the world's largest drinks company, is poised to sell Cinzano in a clear-out of underperforming European brands.

Jack Keenan, head of Diageo's spirits business, indicated last week that the brands would be sold as Diageo continues to rationalise its portfolio and cut costs. "The sales of the European brands should crystallise during the next six to nine months," said Michael Bleakley, analyst at Credit Suisse First Boston.

The other brands to be put up for sale are Greek, German and Italian brandies - Metaxa, Asbach, and Vecchia Romagna.

When Diageo was created in December 1997 by the merger of Guinness and GrandMet, it was left with a surfeit of brands, many of which were underperforming.

Within the last fortnight, Diageo has raised $356m (pounds 218m) by selling 14 North American brands that were losing market share. Eight were Canadian whiskies, and the rest were American bourbons and brandies.

The sale of Cinzano, Asbach, Vecchia Romagna and Metaxa will raise less for the company. This is because Diageo intends to retain the distribution rights to the brands, which give it marketing clout in their respective national markets. While the drinks businesses as a whole are valued at pounds 220m, Mr Bleakley estimates the sale of the brands will raise pounds 110m.

Further brand sales are expected in South America and the Far East. Diageo no longer feels compelled to copy the successful drinks of its competitors and is far more concerned about investing in its own portfolio of leading brands.

"The significance of these disposals is that the company is exiting whole categories where it is weak," said Alex Oldroyd, analyst at Morgan Stanley Dean Witter.

The European brands, while famous in their domestic markets, earn less than their cost of capital. The Italian vermouth Cinzano is the largest of the brands, with annual sales of 2.9 million cases, but it achieves less that a 2 per cent return on capital employed. Asbach, Vecchia Romagna and Metaxa also achieve only single-digit returns.

"The portfolio is being focused on those categories where Diageo has really strong brands in premium positions," said Mr Oldroyd. This means it is concentrating its annual pounds 350m marketing spend on brands such as Smirnoff, the world's top-selling vodka. Its top five brands account for around 40 per cent of profits.

Aside from Smirnoff, Diageo has Johnnie Walker and J&B, the world's leading scotch brands, and in Gordon's and Tanqueray two of the world's top gins. Diageo sells around one third of the world's scotch, gin and vodka.

By emphasising these brands, the company aims to achieve decent growth in an industry that has been dogged by lacklustre sales and concerns about the effects of alcohol on health.

Resources will be devoted to defined segments in key markets. In Spain and Portugal, J&B whisky is a hit in the discotheques of Madrid and the waterfront bars of Lisbon. So J&B will be strongly targeted at young Spaniards and Portugese, while Johnnie Walker will court the older whisky drinker. In this way, Diageo hopes that the brands will avoid competing with one another.

In a further move to raise capital efficiency, Diageo is planning a pounds 2.6bn share buy-back. Chief executive John McGrath stated on Thursday that some sort of repurchase was highly likely.