Diageo under pressure despite growth in whisky sales

A Chinese person takes a glass of whisky at the Johnnie Walker Black Label tasting party in Chengdu. The later timing of Chinese New Year is likely to have dampened sales increases for Diageo. Photograph: China Photos/Getty Images
A Chinese person takes a glass of whisky at the Johnnie Walker Black Label tasting party in Chengdu. The later timing of Chinese New Year is likely to have dampened sales increases for Diageo. Photograph: China Photos/Getty Images
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Drinks giant Diageo – Scotland’s biggest distiller – is this week tipped to report a slowdown in global sales growth, despite expectations of a strong performance from its Scotch whisky brands.

Factors including a ban on the sale of alcohol near highways in India and the later timing of the Chinese New Year are likely to have dampened sales increases in the first half of the financial year for the spirits group behind Johnnie Walker whisky and Smirnoff vodka.

Analysts at Shore Capital expect net sales of £6.6 billion for the six months to 31 December, representing 3.7 per cent organic growth compared to the 4.4 per cent seen in the same period in 2016. Adjusted profits before tax are expected to rise by 4.3 per cent to £2.14bn at the group whose single malt portfolio includes Cardhu and Talisker.

Consumer equity analyst Phil Carroll said he expects the strong sales momentum seen in Europe in the past two years to have continued, driven by the UK, continental Europe and Russia.

He also expects Diageo, which owns 200 brands across 180 countries, to report improvement in its US business and for sales of whisky in particular to fuel growth in Latin America.

Analysts at Hargreaves Lansdown believe profit margin improvements from cost savings and productivity gains will be a key focus for investors and that revenue growth in markets for Scotch and in the US will also come under the spotlight. “Industry level indicators are good, with Scotch exports returning to growth in 2017 and single malt exports breaking the £1bn barrier for the first time,” they said. “As the globally dominant player in Scotch, Diageo should be well placed to benefit.

“Overall we would expect the renewed sense of optimism in the global economy to bode well for Diageo’s higher margin, premium products.”

Carroll said although Shore has a positive stance on Diageo, “we are starting to feel its valuation is up with events”, citing factors such as the rising global interest rate environment and adverse currency movements.

“Whilst we continue to like Diageo as a business, we are starting to have less conviction on our ‘buy’ recommendation.”

In October, Diageo announced that it is to revive two “lost” Scotch whisky distilleries with a major investment more than 30 years after they were shut down. The Port Ellen distillery on Islay and the Brora distillery on the east coast of Sutherland are being brought back into production through a £35 million investment.

Following the closure of the sites in 1983, the whiskies produced by the two “ghost” distilleries have become some of the most highly sought-after.