Diageo stung by China writedown

Crackdowns on lavish spending among Chinese officials and volatility in other emerging markets have dented annual sales and profits at spirits giant Diageo.

Jude Law in The Gentlemans Wager after Johnnie Walker Blue Label launched a partnership with the actor and the film

Scotland’s biggest whisky distiller said it had written down the value of its 40 per cent stake in Chinese spirits maker Shui Jing Fang following a plunge in sales across the country, but it enjoyed rising demand in North America, its largest market.

The £264 million impairment related to Shui Jing Fang led to a 20 per cent slide in operating profits to £2.7 billion for the year to the end of June, while net sales dropped 9 per cent to £10.3bn.

James Edwardes Jones, an analyst at RBC Capital Markets, said: “This was not a vintage set of results from Diageo, but in the context of recent hiccups it counts as satisfactory in our opinion.”

The results came the day after chief executive Ivan Menezes shook up his management team in a move that will see Gilbert Ghostine, president for China and India, leave the group at the end of next month. Menezes, who replaced Paul Walsh at the helm of Diageo last year, said: “Our regional performance has been mixed. In North America we have again delivered top line growth and significant margin expansion and our Western European business is now stable.

“Emerging market weakness, often currency related, but also including some specific issues, such as the anti-extravagance measures in China, has led to weaker top line growth.”

The maker of Johnnie Walker Scotch, Smirnoff vodka and Guinness stout said net sales in Britain were up 2 per cent amid a “relatively flat” overall market, with Baileys benefiting from a new advertising campaign.

Pre-mixed drinks, such as Gordon’s gin and Pimm’s, helped to drive a double-digit increase in the “ready to drink” category, but the firm’s Bell’s blended whisky brand suffered in the face of “increasingly intense price pressure”.

Diageo did not provide a forecast for the current year, but chief financial officer Deirdre Mahlan said that trading in North America and western Europe should continue in a similar trend as recently and emerging markets should improve, probably towards the end of the year.

Sales volumes, which measure the amount of drinks sold, fell 5 per cent in the group’s Asia Pacific and Africa, eastern Europe and Turkey divisions, and by 1 per cent in North America and Latin America. Western Europe was flat.

In the key Nigerian market, volumes fell 9 per cent after inflation curbed disposable incomes, leading people to opt for rivals’ cheaper beers. Diageo has since lowered prices and launched lower-priced brands.

Shore Capital analyst Phil Carroll, who has a “hold” rating on Diageo’s shares, said: “The results look broadly in line from an organic perspective, which we expect to offset any slight disappointment at the reported level.”

Despite the drop in earnings, Diageo proposed a 9 per cent rise in its final dividend to 32p, to be paid on 2 October. That would lift the total payout for the year by the same margin to 51.7p.