A headache for Diageo as it knocks back profit forecasts

BOOZE giant Diageo ran head first into economic reality today, issuing a rare profits warning that indicates no business in the world is safe from the recession.

The Guinness, Smirnoff and Johnnie Walker combine has long been seen as a cash-generating machine that doesn't lose its way in even the foggiest weather. But today it downgraded profit targets, sending the shares tumbling 40p to 868p.

Diageo pushed up profits by 17% to £1.13 billion in the half-year to the end of December, on sales up 18% to £5.1 billion. But the City took more notice of guidance that profits for the full year will be up by between 4% and 6%, rather than the 7%-9% suggested previously. Some analysts were irked that Diageo had not been quicker to alert investors.

Merrill Lynch called the numbers "disappointing" and added: "Even more disappointing is the fact that the company remained fairly confident in its communications to the market as late as December last year."

Diageo finance director Nick Rose said: "We are in for undoubtedly tougher times. Things are getting more difficult across the world."

Recent profit rises are a lot to do with currency movements. Rose conceded: "We have had a real following wind from exchange rates. But for the last few years that has blown against us."

City sentiment towards Diageo is now shifting. Investec this week advised clients that the shares are a hold at best. Cazenove says the slowdown is "significant".

Diageo is seeing firm evidence of trading down, as drinkers forgo luxury brands in favour of more basic tipples. In the key US market, wine fans are switching to cheaper vintages. The European market is the weakest of all, and even booze-hardened Britons are drinking less - sales are down 1%.

But Africa's taste for Guinness and Russia's need for vodka mean Diageo remains the world's leading purveyor of alcohol.