Diageo’s sales ‘severely impacted’ as China bites

China’s anti-extravagance measures have “severely impacted” Diageo’s sales, which combined with weakness in other emerging markets, saw the group’s full-year 2013/14 net sales decline by £1.1bn.

Sales of Diageo’s Scotch brands, which include Johnnie Walker, fell by 20% in China alone

The UK-based drinks group saw organic sales in China plummet by 31% during the period, as both local and international brands declined.

The “weaker trading environment” helped contribute to an overall net sales decline of 10%, from £11.3bn in 2012/13, to £10.2bn.

The decline impacted the group’s gross profit, which fell from £6.9bn to £6.2bn.

In China, sales of Diageo’s baijiu brand, acquired fully in 2013 from Sichuan Chengdu Shuijingfang Group Company (SJF Holdco), Shui Jing Fang declined 78% due to “pricing pressure from other leading brands”, while sales of the group’s international portfolio also dropped 14% in the region, led by Scotch which fell by 20%.

Economic and political issues in Thailand also affected volumes in Asia Pacific heavily, with sales in the country down 24%.

Diageo’s declining trading in emerging markets was however offset by a buoyant North American performance, where spirits sales grew 4%, led by strong performances from super-premium Don Julio Tequila (up 26%), blended Scotch Buchanan’s (24%) and Bulleit whiskey (up 69%).

Market challenges

Ivan Menezes, CEO of Diageo, said: “This year our business has faced macroeconomic and market specific challenges that have impacted our top line performance.

“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.

“But we have gained share and expanded margin while continuing to invest in our brands, our markets and our people to create a stronger business that will deliver on the long term growth opportunities of this attractive industry.”

In Western Europe organic overall sales were down 5%, although the decline is beginning to slow thanks to “modest growth” from Great Britain, Benelux, France and the Nordics.

Menezes reiterated the importance of sticking to the key performance drivers of Reserve brands, innovation, route to consumer initiatives, cost-cutting measures and efficiency, which “give the business clarity and focus”.

As part of the financial results, released today (31 July), Diageo announced it expected to complete the disposal of the Whyte & Mackay business to Emperador by the end of September. Business generated by United Spirits (USL), the sale of which completed on 2 July this year, will be included in the group’s financial results going forward.

Speaking on the year ahead, Menezes was optimistic about recovery in the emerging markets. “The catalysts for a near term recovery of consumer spend in the emerging markets are still weak however the future growth drivers for this industry, its aspirational nature as consumers in the emerging markets see increasing disposable income, are undiminished,” he said.

“Diageo has leading brand and market positions and financial strength and our recent acquisitions have given us a strong emerging market footprint. The opportunity for Diageo to realise our full potential and deliver our performance ambition remains an exciting one.”