Uncertainty arising from the Ukraine crisis and weak consumer confidence has hit Diageo’s sales in Russia and Eastern Europe, delivering a blow to the group’s performance in Europe overall in the first quarter.
The global beers, wines and spirits giant said underlying net sales in Europe fell 1.4% in the three months to the end of September. Sales in Western Europe fell 1%.
Consumer trends across the region were broadly unchanged but a weaker performance in Benelux, following price increases there, and continued weakness in Germany, which is not expected to improve until the second half, all affected performance.
Globally, Diageo - whose brands include Johnnie Walker, Captain Morgan and Guinness - suffered a 1.5% decline in underlying net sales, exacerbated by Asia Pacific, which was down 7.4%.
Diageo said overall performance was in line with expectations, including the 3.5% drop in volumes.
However, the group’s reserve brands, such as Johnnie Walker Blue Label, Tanqueray No Ten and Ciroc vodka, enjoyed a 10% uplift.
North America proved the strongest performing region with a 0.1% underlying net sales uplift.
The transfer of production of Smirnoff Ice Double Black Guarana to Diageo’s DHN joint venture affected net sales growth in South Africa, it said.
Latin America and Caribbean delivered a good performance in the main domestic markets although a decline in net sales in Brazil delivered a 1.4% drop in underlying net sales overall in the region.
Asia Pacific’s poor performance emanated from the decision to reduce inventory levels in South East Asia and the continuing challenging trading environment in China, although the underlying net sales decline there moderated to around 20% in the quarter.
Diageo said India, Global Travel Asia and the Middle East, in contrast, delivered good growth.
Diageo’s net borrowings rose from £8.9bn at the end of June to £10.8bn at the end of the period. This resulted mainly from an extra 26% investment in USL and the consolidation of net borrowings of USL estimated at £765m.
‘In line with expectations’
“Consumer trends in most markets are unchanged and our first-quarter performance is in line with our expectations given the prior year comparison of the performance of our US spirits & wines business and the de-stock we have implemented in South East Asia,” said chief executive Ivan Menezes.
He said consumer demand for mainstream brands in North America was still constrained by weak consumer confidence in average income households while the group’s reserve brands and its innovations continued to perform well, as they did globally.
“Western Europe is now stable and I continue to expect full-year performance to be flat although there will be quarterly fluctuations around that level,” he said.
Emerging markets’ performance remained weak with further currency weakness in a few markets and specific geopolitical situations in some areas.
“However our brand performance has been strong in many markets including Turkey, East Africa, India and Colombia,” he said.
Menezes added: “We expect full-year top-line growth to improve on last year’s performance. Our focus on our six performance drivers continues to build our capabilities and deliver the cultural change I want to see across the business. I am confident we are on the road to realise our full potential.”
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