Diageo in unexpected sales spill

Organic sales at the drinks giant fall 0.7% as emerging market troubles continue.

by Adam Gale
Last Updated: 15 May 2015

When Diageo suffered a 23% hit to its first half pre-tax profits, the blame was firmly on emerging markets. China was bearing down on cognac-sipping bureaucrats and the culture of ‘gift giving’, while the strong pound was causing havoc in Asia and Latin America. The firm may have hoped these woes would be over by now, but apparently not.

Diageo’s organic sales declined 0.7% over the three months to March 31, it announced in a management statement this morning. The leading cause? You guessed it - emerging markets.

Indonesia recently banned the sale of all but the strongest beer in convenience stores (we don't know why they did that either), while Venezuela’s decision to relax currency controls caused the Bolivar to lose 69% of its value, contributing to a forex hit to full year profits which Diageo estimates will be £110m.

It’s not all bad in emerging markets, however. African organic sales rose 8.2% in the quarter, buoyed by a growing taste for Guinness and Diageo's new bitter herb drink Orijin in Nigeria (yum). The firm will be especially encouraged that sales in China, meanwhile, bounced back 13%, as the firm’s baijiu business recovered.

In developed markets, results were mixed. There was a 0.9% increase in North American sales as US drinkers ditched Captain Morgan for Smirnoff Red and Crown Royal Regal Apple, a fruit infused whiskey. In Britain, however, there was a ‘high single digit’ net sales decline, which the firm puts down an unfavourable comparison with last year, when retailers frantically stocked up on booze before an expected duty increase.

Boss Ivan Menezes acknowledged the impact of emerging market and currency troubles, but he also pointed to another cause. ‘It also reflects the actions we have taken to ensure we are building a stronger business,’ he said. ‘Depletions’ are the issue, it seems. Diageo is deliberately letting retailers and wholesalers run lower on stock, as it ‘embed(s) our sell out culture’.

Lean processes may help in the future, but they’re contributing to a lean year now, it seems. Analysts had expected growth of 2%, according to a Bloomberg poll, and their disappointment was reflected in 2.1% fall in the share value this morning, to £19.25.

Analysts will be even more disappointed by the fact that this will be Diageo’s last quarterly update. You’d better stock up on your bitter herb drink then, because from now on, we’ll all have to wait for half-yearly results.


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