Diageo's Sober Outlook

Normally January is a good time for the wine and spirits industry. Coming off what is usually their most profitable quarter, thanks to the holidays, they are more likely to greet the New Year without the hangovers common to so many of their best customers. But this year even the kings of the booze business may feel in need of a few restorative Bloody Marys.

The reason? Concern about consumer spending and exchange rates in 2008. Even Diageo (nyse: DEO), the world's largest wine & spirits company, is looking a tad shaky. According to the AP, the London-based company's Chief Financial Officer Nick Rose said Tuesday that it was "sticking by its forecast of 9% growth in operating profit for the current financial year but acknowledged the target was "probably feeling a little more stretching" amid tougher business conditions.

The company, which owns such well-known brands as Johnnie Walker, Tanqueray, Cuervo, Guinness, Smirnoff and Sterling Vineyards, is a global powerhouse, trading in 180 markets worldwide and generating more than $15.7 billion in sales in 2006, up 19.5% from the previous year. (The company's fiscal year ends in February.) It is aggressively expanding its reach in developing markets, particularly in China and Russia, and is currently trying to add Absolut vodka to its portfolio.

This expansion is key to the company's long-term growth. As Rose noted sales of Guinness were slowing in traditional markets in Europe while they were picking up in newer markets. Rose took a cautious tone when discussing North America: "the current view...is that it's holding up and will continue to hold up."

Fortunately, the company's portfolio is diverse enough that it covers both the middle and high-end of the bar. They may end up selling fewer bottles of Johnnie Walker Blue, which retails for around $240 a bottle, but more of the less expensive Red Label, which sells for around $200 less. One thing is certain, if the year ahead is as tough as they think, the liquor industry may that it could really use a big drink by next January.