Diageo has whisky ‘contingency plan’ in Russia

As spirits escape Russia’s ban on western agricultural imports, Diageo has admitted it already has a contingency plan in case political tensions deteriorate.

Bell’s Scotch whisky, which escaped trade sanctions imposed by the Russian government yesterday, grew by “double digits” in Russia and Eastern Europe in 2013/14

Yesterday (7 August), Russian prime minister Dmitry Medvedev prohibited the import of fruit, vegetables, meat, fish and dairy products from the US, EU, Australia, Canada and Norway for one year.

The decision was made in response to EU sanctions over Moscow’s support for rebels in Ukraine.

Just days before, during Diageo’s end-of-year financial results presentation, group CEO Ivan Menezes said that while Diageo has “a good reputation in Russia”, a contingency plan is in place to help it “stay the course” should the political environment worsen.

“We’re growing market share; we’re building our sales forces up strongly,” he said. “Our business however in the last couple of quarters has slowed. We have a team on the ground that’s very experienced and seasoned. They obviously have the plans in place and are watching the situation carefully, but our business is mostly imported spirits.”

Diageo’s organic net sales growth in Russia and Eastern Europe slowed from 16% in 2012/13, to 2% in 2013/14, as performance was “impacted by reduced consumer confidence and higher excise taxes”.

However, Menezes seemed unconcerned by the impact of the Ukraine crisis, which “offset high single digit growth in the rest of Diageo’s distributor markets in Eastern Europe”. He claimed that although the market is “very exciting”, sales in Russia accounted for less than 2% of Diageo’s overall business.

“Our long-term prospects for our business there is the growth of brown spirits and the trade up from the significant, low-end vodka market,” he added. “That trend we believe will continue and we are well positioned to capitalise on it.”

The majority of Diageo’s business in Russia is in brown spirits, led by Scotch whisky and rum. Captain Morgan sales grew 64% during the recent fiscal year, while the company launched local rum Shark Tooth last June.

Menezes did not expound on what Diageo’s contingency plans are should trade sanctions be imposed on spirits, which would severely impact the group’s Scotch sales in the region.

Russia already seems to be taking action on some spirits entering the country. Earlier this week the country’s Rospotrebnadzor consumer protection agency was preparing to suspend imports of Kentucky Gentleman Bourbon after finding signs of phthalates organic chemicals in the liquid. Simultaneously, it banned the production and sale of products made by McDonald’s, including ice cream, milkshakes, cheeseburgers, and Filet-o-Fish and McChicken sandwiches over apparent concerns of high calorie content.