View from City Road: Why Guinness feels the draught

THE SLOGAN that Guinness is good for you is wearing thin. Tony Greener, the incoming chairman, yesterday virtually admitted that the proverbial last drops of added value have almost been squeezed out of the company's existing brands.

Welcome to the Nineties, in which consumers are more price-sensitive in a world of lower inflation than they were in the eighties, when Guinness was so adept at squeezing its brands.

This is not to deny that Mr Greener and his predecessor, Sir Anthony Tennant, have done a spectacular job. They have ensured that all the old Distillers brands have been properly priced for the first time in half a century and have maximised returns by taking control of more than 90 per cent of the once privately-owned distribution outlets.

But Guinness was inevitably going to close in on the profit ceiling from its brands before either of its British rivals, Allied- Lyons and the Grand Metropolitan subsidiary IDV. Guinness, the beer, like the company's brands of Scotch and gin, is essentially a middle-market product.

Moreover, the brands occupy such strong positions within their respective markets that large-scale volume growth will be difficult, thanks to the emerging weaknesses in such formerly fast-growing European markets as France and Spain.

Guinness has now had to turn to the upstream end of the business to enhance returns further. Its whisky output is not being cut, so the closure of five distilleries smacks of cost-cutting. The spotlight is also being turned up on Cruzcampo, with the Spanish market stuck in reverse gear.

In contrast, both Allied and IDV have a much wider range of drinks products and have their fingers in other pies, such as fast- food operations and pubs, which are showing signs of recovery. Additionally, they have both shown the capacity to exploit new brands such as Haagen-Dazs ice cream.

Adding to Guinness's woes are the upsets at LVMH, where its 24 per cent stake had looked a bull point before the French group's nasty comments yesterday that its prospects were being hurt by Guinness's write-offs. And that is to say nothing of recent increases in French interest rates.

Guinness, though, has one secret weapon - its currency exposure. It normally covers for at least six months ahead, so the second half could see a much-delayed bonanza for one of Britain's biggest exporters.

Even so, the shares at 473p look fully valued even after yesterday's fall.

(Photograph omitted)