Diageo sales flatline in emerging markets battle

Diageo has reported flat sales in the third quarter of its financial year as it continues to struggle against “tough conditions” in the emerging markets, despite a positive performance in China.

Diageo has reported a 0.7% sales decrease in its third quarter results

In the three months to 31 March 2015, net sales fell 0.7%, meaning the UK group’s year-to-date sales dipped 0.3% on an organic basis.

In the Asia Pacific region, which has proven difficult for Diageo in light of China’s austerity crackdown over the past two years, sales dropped 5.5% over the past nine months due to reduced inventory levels.

While “political tensions” and the group’s decision to “hold prices” in the Middle East resulted in declines, sales in China grew 13% due to the recovery of Diageo’s baijiu business. In August last year, the company was forced to write down the value of its Shui Jing Fang baijiu by £264m.

The Asia Pacific weakness was partially offset by a 6.2% sales increase in Africa, where some regional markets experienced double-digit growth due to the success of the Orijin herbal spirit drink.

In the Latin America and Caribbean region, year-to-date sales slipped 3.3%, and plummeted 10.2% in the quarter as a result of “currency volatility” which impacted consumer demand.

In the west, Diageo reports a “broadly flat” performance with a high single-digit decline in Great Britain, but “improved performance” in the US where sales increased 0.2% in the nine months to 31 March and 0.9% in the quarter.

North America success

Demand for the recently launched Canadian whisky brand extension Crown Royal Regal Apple was the “biggest driver” of increased shipments to the US, bolstering the performance of the entire North America market. Smirnoff Red saw an improved performance, however this was offset by “weakness” of Captain Morgan rum.

Diageo’s CEO Ivan Menezes said consumers in North America were its “most resilient”, and while the region’s spirits market is “improving”, he does not “expect to see shipments improve until we have lapped last year”.

The group’s recent acquisitions, principally of Indian drinks group United Spirits, contributed £700m to its sales performance. Its net borrowing decreased £404m to £10.2m due to the net proceeds from the sale of its Bushmills Irish whiskey brand to Jose Cuervo.

“Our performance in the quarter reflects continued tough conditions in the emerging markets and subdued consumer demand in some developed markets,” said Menezes. “However it also reflects the actions we have taken to ensure we are building a stronger business.

He added: “We will continue to strengthen Diageo. We are investing in our brands, enhancing our route to consumer, introducing great innovations such as Crown Royal Regal Apple and Orijin, winning in reserve and focusing on cost and cash. We can realise Diageo’s full potential and deliver our performance ambition.”

In its full-year 2013/14 results, Diageo saw its sales drop by £1.1bn due to the “severe impact” of China’s anti-extravagance campaign.