Diageo’s Sales Growth Trails Estimates Amid China Cutbacks

Diageo Plc (DGE), the world’s biggest distiller, said a slowdown in emerging markets including China and Nigeria weighed on first-half sales growth, sending the shares down the most since 2009.

Organic sales rose 1.8 percent in the six months through December, the London-based company said today, missing the 3.5 percent median estimate of 13 analysts. Operating profit gained 2.9 percent on the same basis, also falling short of the median estimate for 4.5 percent growth.

Government crackdowns on extravagant spending led to plunging sales of high-end baijiu liquor in China, Diageo said, while beer sales declined in Nigeria. The distiller joins companies from Unilever to Remy Cointreau SA that are seeing a slowdown in previously fast-growing regions due to fluctuating currencies, economic turmoil and government crackdowns.

“Diageo is not immune to broader macroeconomic pressures, especially at present in many key emerging markets,” Eddy Hargreaves, an analyst at Canaccord in London, said in a note.

Diageo shares were down 117 pence, or 6.1 percent, at 1,793 pence at 10:15 a.m., the biggest drop since February 2009.

Revenue fell 6 percent in Diageo’s Asia-Pacific region. Sales at baijiu maker ShuiJingFang, over which the company gained consolidated control last year, plunged 66 percent.

Photographer: SeongJoon Cho/Bloomberg

A Diageo Plc employee holds a glass of whisky during a tasting at the company's new Johnnie Walker House in the Gangnam district of Seoul. Close

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A Diageo Plc employee holds a glass of whisky during a tasting at the company's new Johnnie Walker House in the Gangnam district of Seoul.

‘Further Disruption’

Economic turmoil in markets including Thailand and Nigeria and a “challenging environment” in Venezuela and Argentina also weighed on sales, the maker of Johnnie Walker whisky said. Revenue in Africa, Eastern Europe and Turkey edged up 2 percent, restrained by tougher beer sales in Africa. Destocking in western Latin America offset improvements in Brazil.

The maker of Smirnoff vodka expects sales growth to improve in the second half of the year as destocking in Latin America tempers, Chief Financial Officer Deirdre Mahlan said on a conference call with reporters. Still, “the volatility that’s occurring across emerging markets suggests that there could be some further disruption,” she said.

Diageo is seeking to offset emerging-market headwinds with new products in the U.S., the world’s most profitable spirits market, and by selling pricier drinks globally.

North America remains the driver of the business,” Wyn Ellis, an analyst at Numis Securities in London, wrote in a note. Diageo’s outlook statement “indicates only modest expectations in the short term.”

Cost Measures

Sales of Diageo’s most expensive brands rose 19 percent in the half-year, it said, helping improve operating margin, a measure of profitability, by 0.4 percentage points.

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An employee reaches for a case of Diageo Plc's Smirnoff brand vodka in a distribution warehouse in Bolingbrook, Illinois. Close

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An employee reaches for a case of Diageo Plc's Smirnoff brand vodka in a distribution warehouse in Bolingbrook, Illinois.

Operating profit in the first half was 2.06 billion pounds ($3.4 billion), excluding some items, compared with 2 billion pounds a year earlier. Organic measures strip out the effects of acquisitions and currency fluctuations.

The distiller also said today that it will announce detailed cost-cutting measures, aimed at reducing spending by 200 million pounds a year by the end of fiscal 2017.

The cost-cutting program will create a one-time charge of 200 million pounds to 250 million pounds, Mahlan said, adding that the majority of savings will be from information systems, procurement of goods and services, and simplification of the organization, leading to some job cuts.

To contact the reporter on this story: Clementine Fletcher in London at cfletcher5@bloomberg.net

To contact the editor responsible for this story: Celeste Perri at cperri@bloomberg.net

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