Diageo Shares Soar as Lower Chinese Marketing Boosts Profit

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Diageo Plc reported first-half profit growth that beat estimates slightly as the world’s biggest distiller responded to weak demand in China and Southeast Asia by slashing marketing expenditure.

Earnings before interest and tax rose 0.7 percent on a so-called organic basis in the six months ended Dec. 31, London-based Diageo said today, sending the shares up the most in more than three years. The median estimate of 16 analysts surveyed by Bloomberg News was for no change.

Diageo spent 20 percent less marketing the Johnnie Walker whiskey brand in China as the quantity of scotch sold declined by 22 percent. Government anti-corruption measures have curbed shipments of scotch and baijiu liquor in the country at a time when the company is also battling weakness across Europe.

“If the market’s in a free fall, your marketing dollars are better spent elsewhere,” Philip Gorham, an analyst at Morningstar, said by phone. “I think that’s probably temporary, as they will have to plow money behind Johnnie Walker, in particular, in China.”

Diageo shares rose as much as 4.7 percent in London and were up 3.8 percent at 2,036 pence at 11:12 a.m., boosting the stock’s gain this year to 10 percent.

Total spending on marketing declined by 1 percent to 896 million pounds ($1.4 billion) in the first half, the company said, led by a 15 percent drop across the Asia-Pacific region. Diageo pointed to a “significant reduction” in investment in Shui Jing Fang, the Chinese clear-spirit business on which it took a writedown of about 79 million pounds last year.

New Year

Scotch sales in China are “challenging,” Chief Financial Officer Deirdre Mahlan said on a conference call with reporters, adding that the distiller isn’t counting on a significant upturn there. The Chinese New Year period that starts next month will be “relatively soft,” she said, although Chief Executive Officer Ivan Menezes later told analysts that he’s seeing “encouraging early trends.”

Menezes wants to offset headwinds in China with new products in the U.S., the world’s most profitable spirits market. Recently introduced Ciroc Pineapple vodka helped lift sales of that brand by 28 percent, and Crown Royal’s new apple-flavored Canadian whiskey is doing so well that the company is running out of the green bags it’s packaged in, Menezes said.

The North American market is “still a bit soft,” Mahlan said today, with volume declining 2 percent due to continued weakness in Smirnoff vodka, its biggest brand in the region, and a 14 percent decline in Johnnie Walker sales.

Diageo’s first-half organic sales fell 0.1 percent, in line with analyst estimates and an improvement on the first-quarter’s 1.5 percent decline. Organic measures exclude the effects of acquisitions and currency fluctuations.