Diageo's end of year update shows that the food business is still failing to perform. Burger King remains weak, especially in Europe, and Pillsbury has failed to continue the improvement shown in the previous six months. In all, Diageo's results prove that concentrating on drinks rather than food is the right strategy for the company to follow.
Diageo must be glad it is getting out of the food sector. After a promising start to the year Pillsbury had a weak second half amid doubts about the timing of its integration with General Mills. Burger King was also a sore spot, continuing to suffer from lasting health concerns surrounding BSE and foot-and-mouth. This was further compounded by the announcement of one-off $50 million restructuring charges as the management attempts to ready the business for partial flotation.
The Burger King flotation was originally expected to happen later this year, but this is looking increasingly unlikely in current conditions. Worldwide comparable restaurant sales growth remains negative and the new management team will have its work cut out reshaping the business into something more appetizing to investors. John Dasburg was hired in April to head the restructuring and has already removed the North American layer of internal management. However, the fast food chain is still unlikely to be demerged until next year.
Yet outside the food sector it is another story. In its end of year trading update, Diageo reported strong sales in its premium drinks business. The first half of the year saw strong growth in its top brands, such as Smirnoff vodka, Gordon's gin, Guinness and Johnnie Walker whisky, prompting Group Chief Executive Paul Walsh to comment that the division "continues to perform strongly - in line with our expectations."
Diageo's decision to focus on its core drinks division will pave the way for future growth in this area, but the food businesses may have been over neglected. The Burger King shake-up was long overdue and it is no surprise that the flotation will come sooner rather than later. While the current lack of enthusiasm for IPOs provides a convenient excuse, the chain may well be more sellable once restructuring exercises have had time to bear fruit.