Diageo's sales growth slows on emerging markets weakness

Written by Reuters | London | Updated: Jan 30 2014, 21:43pm hrs
DiageoDiageo, the world's biggest distilled drinks company reported a slowdown in sales growth in the last six months. Reuters
Diageo, the world's biggest distilled drinks company reported a slowdown in sales growth in the last six months after demand in China and some other important emerging markets dropped sharply.

The maker of Johnnie Walker whisky, Smirnoff vodka and Guinness beer, which generates about 42 percent of its sales from emerging markets, reported a 1.8 percent rise in sales for the first half of its fiscal year ending in June, following a rise of 2.2 percent in the first quarter, with analysts estimating growth in the second quarter slowing to 1.6 percent.

The results were weaker than analysts had expected, and Diageo's shares were down 6 percent at 1797 pence by 1000 GMT.

"This surprising miss may rather read negatively for the whole industry, given how scale and U.S. exposure is supposed to act as a buffer for Diageo compared to more vulnerable peers," said HSBC analysts in a research note.

Shares in French rivals Pernod Ricard and Remy Cointreau were down 3 percent and 2 percent respectively.

A Chinese government crackdown on gift-giving and personal spending by civil servants has hammered sales of spirits like cognac and its high-end baiju white spirit, eroding sales there for Diageo and its rivals.

"The impact of what's happening in emerging markets has been evolving over the calendar year and while we were hopeful that we'd get some improvement, in fact the weakness has continued through the end of our calendar year and through the holiday period," said Chief Financial Officer Dierdre Mahlan.

She expects sales to improve in the rest of the current fiscal year, but did not provide a forecast.

First-half earnings before items rose 4 percent to 62.6 pence per share.

The company also announced a cost-savings programme aimed at saving 200 million pounds a year by the end of June, 2017. Mahlan said it was too early to quantify any job cuts that may be associated with the savings.

In the six months ended Dec. 31, net sales rose about 5 percent in North America but fell about 1 percent in western Europe, Diageo said, citing weak economies in southern Europe and Ireland.

Sales fell 10 percent in Nigeria, as consumers opted for cheaper beers in the face of high inflation that is constraining disposable incomes. Meanwhile in China price discounting by baiju competitors drove a 66 percent drop in sales for Shuijingfang, the baiju maker in which Diageo has a controlling stake. Overall, Diageo's sales fell 22 percent in China.

In Southeast Asia, net sales fell 11 percent, hurt by political unrest and tax hikes that resulted in double-digit price increases.