Diageo’s share price fell almost 3% today after the drinks giant reported declining sales in many regions.
Net sales declined 0.3% on an organic basis and were down 0.7% in the past quarter, the company reported in an interim management statement for the nine months ended 31 March 2015. Volumes were down 1.7% in the nine months and 0.8% in the quarter.
Chief executive Ivan Menezes said the performance reflected continued tough conditions in emerging markets and reduced consumer demand in some developed markets.
In the US, the success of Crown Royal Regal Apple – a recently launched blend of Crown Royal whiskey and Regal Gala apples - was the biggest driver of increased wine and spirits shipments in the quarter. Diageo said the performance of Smirnoff Red was continuing to improve but had been offset by the weakness of Captain Morgan.
Diageo reported a broadly flat performance in the first half in Europe but said sales in Great Britain had seen a “high single-digit net sales decline” in comparison with last year, when a buy up ahead of an expected duty increase had brought forward sales into the third quarter.
Africa delivered a strong performance in the quarter, with double-digit growth in Africa Regional Markets and East Africa, and improved performance in the quarter in Nigeria. Net spirit sales had grown 4% despite the weak economy in South Africa, said Diageo, although total net sales were down as a result of the transfer of production of Smirnoff Ice Double Black & Guarana to Diageo’s DHN joint venture.
Organic net sales growth by region
|Nine months ended 31 March 2015 (%)||Three months ended 31 March 2015 (%)||Six months ended 31 December 2014 (%)|
|Latin America and Caribbean||-3.3||-10.2||-1|
In Latin America and Caribbean, Diageo reported a good performance in most domestic markets but said currency volatility had impacted consumer demand and inventory levels held by customers in some channels.
Inventory was also an issue in Asia Pacific, with many distributors reducing levels. Regulatory changes to the sale of beer in the off trade are to be introduced in Indonesia and this impacted performance in the quarter. In the Middle East, political tensions and Diageo’s decision to hold prices resulted in a decline in net sales in the quarter. In mainland China, net sales grew 13%, driven by the recovery of Diageo’s baijiu (a distilled spirit) business.
Menezes added that the company was taking action to strengthen its business. “Of key importance is that depletions continue to outpace shipments as we embed our sell out culture,” he said. “In addition, our decision to destock some wholesale channels in South East Asia and Latin America and Caribbean will improve our ability to track consumer and customer trends and reduce future volatility.
“Our decision to destock some wholesale channels will improve our ability to track consumer and customer trends and reduce future volatility”
“Consumers in North America remain the most resilient and while lower gas prices and a more favourable macro outlook have not led to a significant shift, growth in the spirits category is improving and our depletion performance continues to build momentum, although I do not expect to see shipments improve until we have lapped last year.”
The drinks giant also announced changes to its executive committee with Andy Fennell, currently president of Diageo Africa, leaving the business after 18 years and John O’Keeffe, currently managing director of Guinness in Nigeria, taking over the role. Soren Lauridsen will step into O’Keeffe’s shoes.
As of 2.30pm (16 April), the share price had fallen 58p, or 2.9%, over tyhe day to 1,909p
Analyst Martin Deebo described the results for the third quarter as disappointing, although he said he believed the business would recover.
“Patience is required,” he said in a note issued today. “It’s our belief in a demand-led recovery, management’s determination to stamp out the sins of the past and the relative valuation and underperformance, that keeps us believers this morning. But it’s going to take longer than we hoped. We think investors have the summer to kick the tyres before deciding whether to drive out of the showroom.”