Diageo Fuels Emerging-Market Concerns as Distillers’ Sales Slide

Diageo Plc and Remy Cointreau SA reported sales that missed estimates, casting doubt over the outlook for distillers as growth slows in emerging regions.

Diageo, the world’s biggest liquor maker, said frailty in markets including China will weigh on growth this year after posting an unexpected drop in third-quarter revenue. Remy, which makes Remy Martin cognac, said it expects to report a decline of as much as 40 percent in annual profit as China’s government cracks down on extravagant spending on gifting and banqueting.

“We expect emerging markets to remain weak” in the coming quarter, Andrea Pistacchi, an analyst at Citigroup Inc., said in a note. Diageo’s sales were “clearly disappointing.”

Companies from Nestle SA to Unilever have pointed to political uncertainty and slowing growth in some key emerging economies, previously seen as a panacea to counterbalance the more developed markets of the U.S. and Europe. Diageo, which sells spirits including Johnnie Walker and Smirnoff, has made acquisitions in the past few years to expand outside its European heartland in economies where growth is now stumbling.

Diageo slid as much as 5.1 percent to 1,804 pence in London trading and was down 3.7 percent at 9:17 a.m., the steepest drop in the benchmark FTSE 100 Index. Remy fell 3.6 percent to 60.71 euros, after earlier tumbling as much as 6.6 percent, while Pernod Ricard SA dropped as much as 3.6 percent in Paris.

Sales at Diageo dropped 1.3 percent, excluding acquisitions and currency shifts, in the three months through March, the London-based maker of Guinness stout said today. That compared with the median estimate of 11 analysts surveyed by Bloomberg for growth of 1.8 percent.

‘Challenging Environment’

“This is clearly a disappointing statement,” said Chris Wickham, an analyst at Oriel Securities in London. “Some of the disruption to emerging markets experienced in the first half appeared to remain in place in the third quarter.”

Diageo, which offered about $1.9 billion this week to gain control of India’s United Spirits Ltd. and grab a stronger foothold in the world’s biggest whiskey market, said results reflect “the challenging environment we are operating in.”

The volume of goods sold in the quarter fell 1 percent. Sales were hurt by slowing economies in markets such as Russia and South Africa, Diageo said. Southeast Asia saw “further negative impact from the political instability in Thailand and lower trade confidence across a number of markets.”

Sales of Diageo’s Shuijingfang baijiu drink in China reflected “the weaker performance in Chinese white spirits” in the final three months of 2013, the company said. Diageo consolidated its control over the drink’s maker last year.

Remy Decline

“Recent events in China are not a blip but instead mark a structural change in the market,” Jonathan Fyfe, an analyst at Mirabaud Securities LLP, wrote in a note to investors.

Remy, which gets about a third of sales from the Asia region, said its adjusted operating profit probably fell 35 percent to 40 percent in the 12 months through March. Citigroup and UBS analysts had estimated a 33 percent decline.

Organic revenue declined 16 percent in the fourth quarter as cognac sales plunged 32 percent, the distiller said.

Diageo said today it has recalculated sales in Venezuela to reflect “the new currency-exchange mechanism and the related reporting implications.” Venezuela last month allowed the bolivar to weaken 88 percent on a new currency market designed to allow companies to obtain dollars in a country where shortages have stoked the world’s fastest inflation. Consumer prices in the country rose 57.3 percent in February.

North America, Diageo’s largest region, saw similar sales patterns in the third quarter to its first half, with revenue rising 1.2 percent. Western Europe “continues to drive incremental improvement,” also increasing 1.2 percent, it said.

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