After Terry Smith re-opened Mayonnaise-gate in his annual Fundsmith letter last week, Alan Jope (the boss at Unilever, which is the company under fire from Smith) has claimed this week’s best soundbite: “we’re at peak inflation, not peak prices,” he told an audience at the World Economic Forum on Tuesday.
The first part of his statement is correct or incorrect depending on which inflation metric you use. In December, CPI retreated for the second consecutive month on falling energy prices, but Core CPI (which excludes food and fuel) rose back up to its October levels and wage inflation hit a new high of 6.4%. And so, while the price inflation of goods might have stabilised, service inflation looks like it might have further to run. This week stocks wobbled as investors priced in the likelihood of a 0.5% increase in interest rates when the Bank of England meets again in February.
But final quarter trading statements from some of Britain’s biggest businesses continue to provide respite from the gloom of the economic situation. This week we’ll be looking at the announcements from:
- Diageo - which has made another big acquisition
- Pearson - where turnaround plans continue to look good
Diageo hopes rum can become its new tequila
Diageo (LON:DGE) doesn’t tend to cheap out when it makes acquisitions. An upfront payment of €260m, plus performance fees of up to €177.5m might seem exorbitant for a single brand of rum. But in 2017, the company paid $700m for George Clooney’s four-year old tequila company Casamigos. By comparison this latest acquisition is small fry.
Don Papa (the newly acquired brand) is characterised as a super-premium rum and it seems to have been bought to fill a gap in Diageo’s high-end rum offering (a role Casamigos played in the tequila market). And how did that acquisition work out? Pretty well so far. In the financial year to June 2018, the first full year following the Casamigos acquisition, tequila contributed 4% of the company’s total sales. In FY2022 tequila’s contribution had risen to 10% and Casamigo sales rose more than 90% off organic volume growth of 82%.
Hefty spending isn’t too much of a problem for companies that can squeeze profits out of their investments like Diageo can. In the five years since Casamigos joined the fold, the company’s return on invested capital (ROIC) has averaged 11.25%. Revenues have risen…
