Diageo Says Growth in U.S. Spirits Industry Slows

By Peter Evans 

LONDON-- Diageo PLC said growth in the U.S. spirits industry slowed in the past year amid intense price competition and signs that drinkers are falling out of love with flavored vodka.

The world's biggest liquor maker said an uneven economic recovery in the U.S. had eaten into sales across the industry and forced distillers to cut the prices of premium products. Diageo said its own sales over Thanksgiving had been weaker than expected.

"Our view, based on all the data and feedback from our distributors, is that industry sales growth has slowed," said Larry Schwartz, Diageo North America president, on a call with investors on Wednesday.

North America is Diageo's biggest and most profitable market, accounting for around a third of its annual GBP10.26 billion ($16.13 billion) in sales. The company said industry sales growth over the last 12 months had been between 3% and 3.5%, a slowdown of "about half a point" from a year earlier.

The news sent Diageo's shares down as much as 2.4%, hitting a near two-month low, though they rebounded to end London trading down 2% at 1,791 pence. Shares in French drinks makers Pernod Ricard SA and Rémy Cointreau SA--which both run big U.S. businesses--also fell Wednesday.

Diageo has in recent years held--or even increased--the price of many of its brands in the U.S., including Smirnoff vodka and Captain Morgan rum, even as promotional activity has ramped up. But the company said that to stay competitive, it had been forced to take fewer price increases this year and had started deploying "more tactical pricing actions."

Still, Diageo said the luxury side of its business in the U.S.--referring to brands that sell for more than $40 a bottle--had remained strong.

The U.K.-based distiller also said it had seen signs of "flavor fatigue" among American vodka drinkers. In recent years, dozens of vodka flavors have appeared on the market, allowing Diageo and other liquor companies to steal market share at the expense of traditional spirits.

But Mr. Schwartz said Smirnoff flavors--which include fluffed marshmallow and whipped cream--are now in decline.

Write to Peter Evans at [e-mail]

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