Credit: Kalyan Chakravarthy/Flickr

Diageo and the disadvantages of being a multinational

Currency hangover continues to hit profits at the world's largest drinks maker.

by Adam Gale
Last Updated: 28 Jan 2016

Being a multinational is somewhat like having seven kids. Very rewarding perhaps, but there’s always something going off with one of them. Back in 2014-2015, Diageo’s problem child was China. The country’s crackdown on Cognac-sipping bureaucrats poured cold water all over the drinks giants’ profits. Strong sterling only made matters worse, affecting Latin America too. But at least sales in the developed world were okay.

Now, not so much. Organic sales in Diageo’s biggest market, North America, fell 2% in the six months to the end of last year, as Americans tire of the company's great range of exotically-flavoured vodkas (nothing too exotic mind – we’re talking apple rather than crab) and the firm’s new, lean ‘replenishment’ distribution model reduces shipments.

On the upside, however, China has now come to its senses and started drinking again (as good a measure as any of the state of its consumer economy). Organic growth there was 4%, led by the dramatic resurgence of the Shui Jing Fang spirit company. Sales at the Chinese firm fell 78% in the year after Diageo took a controlling stake, but have risen again 73% in the last six months.

What seems to be constant is the problem with Forex. It cost Diageo when sterling was strong, and it’s still costing it now that it’s weak, sending net sales down 5% on a reported basis to £5.6bn and operating profits before disposals down 7%. Both would have been up 2% on a constant currency basis. The reason is of course that other currencies - mostly in emerging markets but also the euro – are even weaker than the pound. The strong dollar is only partly offsetting the impact from this. Who’d be a multinational, eh?

Of course, there are some advantages. Currency movements won’t always work against Diageo, and access to so many markets not only allows it scale but also security against precisely the kinds of ups and downs that the US and China have experienced. The last couple of years under chief executive Ivan Menezes may have been a little rocky, but they could easily have been worse.

Menezes seems fairly upbeat about the future anyway, predicting ‘mid-single digit top line growth’ over the next three years. Bottoms up.


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