SHARES in Diageo were hit today as Scotland’s biggest whisky company reported a worse-than-expected slowdown in sales growth, partly blaming the official clampdown on expensive gift-giving and personal spending by government mandarins in China.
There was also weakness in other emerging markets, particularly Nigeria and Thailand, which resulted in net sales growth of 1.8 per cent in what Diageo chief executive Ivan Menezes called a “tough” first trading half.
That was down from growth of 2.2 per cent in the first quarter, with Menezes saying he remained “cautious” on the medium term outlook and expected it to be 2015 before any trading rebound in China.
In Asia-Pacific Diageo’s sales volumes declined 6 per cent, while they slumped 23 per cent in China. “The [Chinese]
government’s anti-extravagance measures and their impact are well understood,” Menezes said. “The current Chinese New Year is unlikely to see a rebound.”
Diageo’s shares closed down 4.7 per cent, or 90p, at 1,820p. It was a better picture in Diageo’s main market of North America, where sales were up 5 per cent and sales of flagship brand Johnnie Walker lifted 16 per cent on the back of boosted marketing spending.
The company, the world’s biggest spirits business, with other brands including Smirnoff and Ciroc vodkas and Captain Morgan rum, also saw sales rise 8 per cent in Latin America and the Caribbean.
Menezes, who replaced Paul Walsh at the helm last year, said the strategy would remain one of investment in emerging markets despite short-term “shocks”.
He cited the company’s strong performance in Latin America now after weathering difficulties in the likes of Brazil, Argentina and Venezuela. The group generates 42 per cent of its sales in emerging markets.
The Diageo boss, unveiling a group pre-tax profit up to
£2.13 billion from £1.92bn, added that while GDP growth in emerging markets had now slowed to 4 or 5 per cent compared with 7.5 per cent in recent years that was still well ahead of growth in developed nations. An interim dividend of 19.7p has been declared for the six months to end-December – up 9 per cent on the payout of 18.1p a year ago.
The UK and Europe also continued their improvement from Q1, with sales down 1 per cent, although parts of austerity-racked southern Europe remained problematic, Diageo said.
Group sales fell to £8bn from £8.01bn from £8.13bn. “This surprising [sales] miss may read rather negatively for the whole industry, given how scale and US exposure is supposed to act as a buffer for Diageo compared to more vulnerable peers,” HSBC drinks analysts said in a research note.
Shares in French rivals Pernod Ricard and Remy Cointreau, already hit by similar emerging market concerns, each fell about 3 per cent.
Menezes hinted at potential looming job losses globally, saying Diageo could shake out further effiencies in ares like back office, infrastructure, supply chains and decentralised management to make the business more “agile”.
Asked about potential redundancies, he said: “It’s too early. The detailed plans we will be developing in the next couple of months. Our people will be the first to know.”