Diageo can't drown all its sorrows in strong sterling

The drink giant's sales have suffered amid its continuing commitment to emerging markets and a Chinese crackdown on extravagance.

by Adam Gale
Last Updated: 03 Nov 2014

During the financial crisis, emerging markets seemed like a pretty awesome place for big businesses to invest. Rapid growth in consumer spending is good for business, right? But as Diageo is discovering, there can be risks to expanding too rapidly outside your heartlands.
 
The drinks giant’s revenues fell 8.5%, from £15.3bn to £14bn, in the year to June, on the back of falling sales in emerging markets – which is a problem, given two-fifths of its sales are in those markets.
 
Pre-tax profits also fell from £3.1bn to £2.7bn. Chief executive Ivan Menezes blamed that on ‘macroeconomic and market specific challenges’, for which read forex and unexpectedly frugal Chinese bureaucrats.
 
Everyone and their dog is blaming the strong pound for falling profits, but Diageo’s woes in China are harder to explain away. The firm bought a controlling stake in Chinese spirit manufacturer Shui Jing Fang in 2011, which seemed like a good move until Chinese president Xi Jinping ordered lavish-banqueting Chinese officials to ease up on the extravagance (and presumably the Johnnie Walker) at the end of 2012.
 
That was bad luck. Could have happened to anybody (and other Western spirits sellers, including Remy Cointreau, have been hit). But then Diageo bought the remaining 47% of Shui Jing Fang’s shares for £233m in 2013, after the anti-extravagance measures came in. That has proved costly, given that Shui Jing Fang’s sales have fallen 78% in the last year.
 
It isn’t all bad news for Menezes though. Revenues in Western Europe are level, North American sales are up 3% and the company continues to record double-digit growth in India, thanks to the country’s growing taste for whiskey.
 
The firm clearly hasn’t given up on emerging markets, either. Menezes said that despite the ‘catalysts for near term recovery of consumer spend in emerging markets’ being weak, ‘future growth drivers…as consumers in the emerging markets see increasing disposable income, are undiminished’.
 
Which must be something of a relief to shareholders: even with the less-than-brilliant results, shares were down a mere 0.2% to 1,785p in mid-morning trading.

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