Diageo’s full-year results were dragged down by problems with the Burger King chain. The company’s premium drinks brands once again delivered strong performance, recording a 13% increase in operating profits. But BK’s sales lagged amid growing consumer concern over food safety and health, and an upturn doesn’t look likely anytime soon. Diageo needs to get rid of the
business – but finding a buyer will be a nightmare.

Full-year turnover at Diageo, the UK drinks and fast-food group and world’s largest spirits manufacturer, grew at an organic basis of 5% to $19.1 billion. The company’s premium drink brands, which accounted for 59% of Diageo’s overall turnover in 2001, saw a sales increase of 7% to $11.3 billion as a result of higher prices and new ready-to-drink lines such as Smirnoff Ice. However, sales at Burger King continue to deteriorate, with worldwide comparable restaurant sales and operating profits declining by 4%
and 12%, respectively.

Burger King’s disappointing performance is in line with other fast-food chains’ results. McDonald’s H1 net income was down 16% as concerns over obesity, mad cow disease and the foot and mouth crisis deterred consumers in North America and Europe. It remains to be seen whether Burger King’s commitment to buying beef from suppliers who adhere to strict animal-welfare guidelines (its latest move to address concern over food safety) will be successful.

The best solution to Diageo’s continuing problems with Burger King is clearly to separate the strong drinks business from the troubled fast-food chain. Indeed, for the past year, Diageo has repeatedly announced its intention to divest the Burger King franchise. Unfortunately, these latest results might hamper plans to sell the chain.

Diageo’s chairman Nick Rose is now predicting little likelihood of a divestment any time soon. Understandable – it just isn’t a business that many firms would want to buy into at the moment, and the current state of the markets rules out an IPO. Yet with improvement in Burger King unlikely to occur before the next fiscal year, the fast food chain will only slow Diageo’s efforts in focusing on its premium drinks segment.

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