Future plans for Guinness business remain uncertain

Things have finally come to a head at Guinness. On Monday morning, Mr John McGrath, the group chief executive of Diageo put an end to months of speculation about the future of the 240-year-old brewer.

Guinness is to remain an integral part of a slimmed down Diageo, which is divesting itself of its food business Pillsbury. The creamy stout is one of eight brands that the company has identified as "global priority brands" which account for 85 per cent of operating profits of £1.76 billion sterling last year. "These brands will be the key driver of success for the new organisation," predicted Mr McGrath.

The other seven brands are Johnnie Walker, Baileys, Smirnoff, J&B, Cuervo, Tanqueray and Malibu. It does not require a deep knowledge of the drinks business to notice that Guinness is the only beer among this pantheon. Mr McGrath and Mr Paul Walsh, his designated successor, gave some hints as to the shopping list Diageo had drawn up on which to spend the $2 billion (€2.14 billion) war chest that the sale of the Pillsbury business had freed up. There were no indications that a stable mate for Guinness was being sought and, despite Mr McGrath and Mr Walsh's statements this week, the view persists that the brewer will be on the block sooner rather than later.

The uncertainty over its future all adds to the air of crisis that is building around Guinness. Sales of the famous stout in Ireland, still its single most important market, are falling. Volumes in the next most important market - Britain - may be on the increase but the British beer market is going through its greatest period of rationalisation in recent years. The brand is also under sustained pressure in Africa - its third biggest market - as nearly bankrupt governments put up excise duty on beer. Earlier this month, Diageo released a trading statement covering performance in the year to June 2000. Buried in the statement was the surprising news that sales of Guinness in Ireland were expected to be down by 4 per cent. Despite a massive advertising campaign aimed at appealing to younger drinkers, the stout is losing out to spirit-based drinks and lagers.

The decline in Irish sales triggered a review process at Guinness Ireland Group four months ago. The process is not yet complete but the company was bounced into making an announcement concerning its operations in Dundalk after rumours of job cuts starting circulating in the Co Louth town.

Guinness is to close one brewery in the town - Macardle Moore which makes the eponymous brown ale - and halve the workforce at another - Dundalk Brewing, the former Great Northern Brewery and home to Harp Larger. A total of 90 jobs will go.

Also going is the group's packaging plant in Dundalk - Dundalk Packaging - with the loss of 200 jobs.

The review is not complete and the assumption is that there is more bad news to come. Guinness had originally wanted to close both breweries in Dundalk, according to the Department of Enterprise, Trade and Employment, and eventually may do so. The company was talked out of carrying through its drastic plan by the Tanaiste, Ms Harney, who had a number of meetings with Mr Colin Storm, the head of Guinness Brewing Worldwide. The company can be expected to look for additional savings from the ongoing review of its other operations in Ireland. The small Cherry's brewery in Waterford, which employs around 40, is seen as the most vulnerable. It makes Smithwicks and a small amount of Hoffmans, both brands that are on the decline.

The future of the Smithwicks Brewery in Kilkenny, which actually brews Budweiser under licence, is more secure, as are the 190 jobs there.

The prospect of Guinness ceasing the production of stout at St James's Gate brewery in Dublin seems remote. Some retrenchment in Dublin is expected though, as it is the company's Irish headquarters.

Guinness employs 800 people in the North, some of whom work in a number of pubs and hotels owned by the company, none of which are seen as part of the core business. The company's packaging plant in Belfast will receive a boost, as much of the work currently done in Dundalk will be transferred there. Additional jobs are to be created with the help of grants from the Industrial Development Board of Northern Ireland. In Britain, Guinness expects sales will be up 3 per cent in the full year, despite declining beer sales generally and contraction in the brewing industry. In the last year, two of the biggest names in British brewing have changed hands. Interbrew, the giant privately held Belgian beer company bought Whitbread's beer interests for £400 million sterling (€640 million) and last month it paid £2.3 billion for the breweries owned by Bass. Baron Paul de Keersmaeker, the company's chairman, has made it clear that further expansion is planned and that the group is keen to acquire a true global brand such as Guinness.

Nigeria, where Guinness built its first brewery outside Ireland 50 years ago, is the single most important market outside of Ireland and Britain. The company owns 53 per cent of the listed company Guinness Nigeria. Over the next two years Guinness plans to invest $20 million in the Nigerian operation on the back of a 40 per cent increase in sales in 1999. The re-imposition of a 40 per cent excise duty by the cash-strapped government of Nigeria has slowed growth to 5 per cent and threatened the viability of these plans.

The picture is similar elsewhere on the continent. Guinness owns a 47 per cent share in East African Breweries, which operates in Kenya, Uganda and Tanzania. Beer consumption is declining in Kenya, the region's largest economy, which is experiencing serious economic problems. Guinness is experiencing severe competition in all its main African markets from South African Breweries (SAB), which has been expanding aggressively. SAB's subsidiary in Uganda - Nile Breweries - has increased its share of the market to 55 per cent, mostly at the expense of the local Guinness-backed operation.

Sales in Africa as a whole are expected to increase by only 7 per cent this year. Beer consumption is also falling in Singapore and Malaysia, where Guinness has an interest in a brewery. Sales in the whole Asia Pacific region are only predicted to rise by 2 per cent.

Exports of draught Guinness to the United States will be down 1 per cent. This week Diageo announced plans that it hopes will help revive Guinness's global fortunes. The group is to integrate Guinness with United Distillers and Vintners, its wine and spirits arm. Merrill Lynch, who are brokers to the company, predict that Diageo will achieve cost savings of £100 million by 2003 by integrating the two companies.

The move will have the biggest impact in mature markets such as Ireland and Britain, where drinking patterns have changed.

Guinness is losing sales in these markets to a variety of spirit-based products, many of which are Diageo brands such as Smirnoff, according to Mr Philip Hawkins, a drinks industry analyst with Merrill Lynch in London.

There has also been a change in people's drinking patterns, with most younger consumers now having a repertoire of drinks which they will consume rather than one usual tipple. In this context, Guinness is now seen as just one of eight core brands by Diageo, and it makes sense to distribute is as far as possible in tandem with the other major brands such as Smirnoff and Baileys, according to Mr Hawkins. This approach will help boost sales in the US, which is a huge potential market, he believes.

The closer integration of Guinness makes a sale of the company much less likely in the short term, he argues. Despite its many woes, Guinness remains one of the world's most valuable brands, but its worth is declining. It is was valued at £1.2 billion and ranked as the 73rd most valuable brand in the world this month by Interbrand, an international consultancy specialising in such valuations. The bad news is that last year it was ranked 59th and was worth £1.3 billion. Tempted though they might have been to sell Guinness and concentrate purely on spirits, any attempt by Diageo to unlock the value of the brand would have been difficult. The complex relationships that it has entered into with subsidiaries across the globe would make it hard to realise the company's full value in a sale. The integration of the company with United Distillers & Vintners operations around the world will make this even harder, says Mr Hawkins.

Guinness may well be sold in the future but, if so, it will be as part of a package or business that includes the other main Diageo brands, he predicts.