Diageo’s profits hit as global Scotch sales fall

Ivan Menezes, incoming chief executive at Diageo,said that the world is still economically and politically uneven. Picture: Contributed

Ivan Menezes, incoming chief executive at Diageo,said that the world is still economically and politically uneven. Picture: Contributed

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A SLOWDOWN in the American drinks market and the impact of the oil price slump on consumer sentiment in ­energy producing countries have hit profits at Diageo, Scotland’s biggest whisky producer.

Despite the 18 per cent fall in half-time operating profits to £1.67 billion from £2bn, and global Scotch sales down 19 per cent, the company boosted its dividend by 9 per cent to 21.5p in the six months to end-December, sending its shares higher.

Group sales largely trod water at £5.9bn. Ivan Menezes, Diageo’s chief executive, said he expected no sharp early recovery against the trading headwinds.

“The world is still economically and politically uneven. We are not counting on any big bounceback or improvement,” he said.

Diageo – maker of Johnnie Walker – also took a £280 million currency hit to depress profits in the latest trading ­period. Sales in its biggest market, North America, slipped 2 per cent as the group held fire on some price increases and did more promotional activity.

The drinks industry has been hit by economic woes in key emerging markets in the past 18 months or so, with Diageo’s sales to Africa falling 4 per cent, and to Latin America and the Caribbean by 31 per cent this time round.

Menezes said one-third of its emerging market business was affected by the tough conditions. “It’s the usual suspects, Russia, Venezuela, Nigeria, clearly with some of the oil [price fall] impact,” he observed.

In its Scotch category, Diageo’s premium Johnnie Walker brand saw sales slide 18 per cent, with J&B off 10 per cent, Bells down 15 per cent, and White Horse 21 per cent lower. However, single malts saw sales up 5 per cent.

Menezes yesterday said that Diageo would be “very cautious” on the nascent industry trend of flavouring whisky.

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He said that a drink like vodka (the group owns the Smirnoff brand) lent itself to flavouring experiments as it was served with many different mixers.

But Menezes said caution on whisky experimentation was necessary because it was largely sold on its “authenticity” and ageing. “We will be very careful. We won’t be playing around with flavours in drinks like Bulleit [rye mash whisky] and Johnnie Walker,” he said. “You will see us be very cautious in driving a [different] whisky flavour.”

The fall in spirits sales was relatively uniform, with revenues at both Smirnoff and Captain Morgan rum 
7 per cent lower.

In Europe, sales dropped 6 per cent, with a stable performance in western Europe and strong growth in Turkey outweighed by tough trading in Russia and eastern Europe.

The half saw Diageo acquire control of United Spirits, India’s biggest spirits player. Menezes said the integration was going well, with the parent company now moving from governance at United to operational performance.

He said he had high hopes for the group’s African business, where it opened its first brewery in Nigeria in 1964, over the next decade. “The sub-saharan demograpics are very strong,” he added.

Menezes also denied the group was strong-arming suppliers after a letter was sent to them saying that from this Sunday it will extend the number of days it takes to make payments from 60 to 90. He said “nobody was being forced” to sign the new terms, and it was a “preference” of the group, not mandatory. He said his door was open to talk about the issue with suppliers.

“We need strong suppliers. We are not in the business of flipping them around every year,” he said.

• Diageo’s shares closed up 3.1 per cent, or 60.5p, at 2,022.5p.

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