Diageo loses £330m in full-year net sales

Diageo’s net sales and profit declined in 2015/16 due to currency weakness, but the group has hailed a return to growth for its six global brands and key US market.

All six of Diageo’s ‘global giants’ are back in growth on an organic basis

In the 12 months to 30 June 2016, the Johnnie Walker Scotch whisky and Smirnoff vodka maker’s net sales slipped 3% on a reported basis to £10.4 billion, while net profit fell 6% to £2.24bn.

In total, Diageo lost almost £330m in net sales compared to 2014/15 and £137m in net profits due unfavourable exchange movements and weak currencies against the sterling, including the South African rand, Venezuelan bolivar and the Brazilian real.

The group also issued an impairment charge on cachaça brand Ypióca totalling £118m and also disclosed £49m worth of “disengagement agreements” relating to its Indian subsidiary United Spirits.

However, on an organic basis, which discounts acquisitions and currency fluctuations, net sales grew 2.8%, operating profit increased 3.5%, and total volume saw a 1.3% uplift.

‘Stronger’ in F17

Diageo forecasts a “stronger performance” of mid-single-digit top line growth in fiscal 2017 off the back off more favourable exchange rate movements, which it believes will add £1.1bn to net sales.

While Diageo admitted difficulties in its key North America market in H1, the group has celebrated a return to growth in the region, with net sales growing 3% thanks to the performance of its North American whiskey portfolio, which includes Crown Royal Canadian whisky and Bulleit Bourbon.

Latin America and Caribbean proved to be the most challenging market for Diageo in the year, with reported net sales plummeting 16% due to currency weakness and subdued consumer demand.

On an organic basis, all of Diageo’s six ‘global giants’ – Johnnie Walker, Smirnoff, Baileys, Captain Morgan, Tanqueray and Guinness – witnessed growth. Only Johnnie Walker declined on a reported basis, but Diageo’s reserve Scotch malts portfolio increased 6%.

After reporting a hefty 34% sales loss in H1 2015/16, the super-premium Ciroc vodka grew net sales by 2%, driven by the “success” of its apple-flavoured variant in the US.

‘Local stars’ decline

However, the majority of Diageo’s ‘local stars’ portfolio, which represent 19% of the firm’s total sales, experienced significant losses in reported net sales. In particular, the firm’s Ypióca cachaça and Cacique rum declined 28% and 24% respectively.

“This is a good set of results delivering what we set out to achieve this time last year and demonstrating our momentum,” said Ivan Menezes, CEO of Diageo.

“This better performance reflects the work we have done to strengthen our big brands through marketing and innovation, as well as expanding our distribution reach.

“Our six global brands and our US spirits business are all back in growth and we have seen a significant improvement in the performance of our Scotch and beer portfolios.

He continued: “These results position us well to deliver a stronger performance in F17. We are confident of achieving our objective of mid-single digit top line growth, and in the three years ending F19 delivering 100bps of organic operating margin improvement.”

On Brexit, which Diageo advocated against, the group said it is “working closely with government and industry bodies to ensure its views are reflected in the transition process”.

The group added: “Diageo welcomes the formation of a specialist international trade department, as it is important for Diageo that the UK continues to benefit from open access to the EU as well as favourable international trade agreements.”