Why China's anti-corruption drive is hammering Diageo and Remy Cointreau

A Chinese government crackdown on wining and dining means less whiskey sales. The drinks giants need to guard against emerging market turmoil.

by Rachel Savage
Last Updated: 20 Oct 2014

When the good times are rolling, crack out a dram. That had been the motto of pretty much every top brass Chinese official worth their salt in the last few years, while they liberally splashed out on Rolex watches, Aston Martins and Burberry trench coats.

However, since the once-in-a-decade change at the top in China last year, there’s been a government crackdown on boozy banquets and extravagant gifts. Now, Diageo and Rémy Cointreau are feeling the effects of the new sober lifestyle.

Diageo’s ‘organic net sales’ were down 1.3% in the three months to the end of March, with volume falling 2%. More Guinness, Smirnoff and Tanqueray was quaffed in North America, Western Europe and Latin America – a whopping 27.7% more in the latter.

However, sales plunged 19% in Asia Pacific, as double-digit growth in India (where Diageo put in a £1.1bn bid for a majority stake in United Spirits this week) and the Middle East failed to balance out political instability in Thailand and Chinese sobriety.

Meanwhile, Rémy Cointreau, which makes Mount Gay Rum as well as Cointreau liquer, reported organic sales for the year to the end of March were down 10.7%. With an admirably French lack of tact, the cognac company blamed ‘the Chinese government’s anti-extravagance policy’ for a fall of 16.1% in its Chinese revenues.

European luxury brands, including companies that sell pricey spirits, have done pretty well among the newly wealthy in emerging economies over the last decade or so. However, with market turmoil from investors moving their money back to Western economies as the Fed started winding down quantitative easing, a slowdown in China (which MT argued yesterday shouldn’t be taken at face value) and political instability everywhere from Ukraine to Turkey and Thailand, companies would do well to stay sober in emerging markets.

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