Diageo net sales slide in the third quarter as volumes fall

By Arabella Mileham

Published: 16 April, 2015

Diageo saw net sales fall 0.7% in the third quarter of this year, with volumes also down 0.8%.

Figures released this morning show net sales over the nine months to 31 March were down 0.3% on an organic basis, with overall volumes also falling 1.7%. Net sales in the nine months grew 4.6% on a reported basis, but this was boosted by the acquisition of United Spirits, which contributed around £700m and offset the impact of adverse currency movements. These totalled £298m, and there was also a reduction of £28m due to disposals.

Sales across Europe fell 1.3% in the last quarter, following a flat performance in the first half of the year. The UK saw sales decline, but the company said this was due to unfavourable comparisons, with an anticipated duty increase last year brought sales forward into the third quarter.

The company reported strong growth in Africa, up 8.2%, and North America also saw improved performance, rising from -0.1% in the six months to 31 December, to 0.9% in the latest quarter. This was driven by the success of Crown Royal Regal Apple, which helped offset weakness of Captain Morgan.

Asia Pacific continued to be a challenge, as destocking of inventories continued, but the recovery of Diageo's baijiu business in China boosted net sales by 13%.

The company also reported net debt down £404m, following the sale of Bushmills, but the exchange rate adversely affected net sales and operating profit.

Chief Executive Ivan Menezes said the performance reflected tough conditions in the emerging markets and subdued consumer demand in some developed markets, but pointed to the steps the company has taken to strengthen the business.

"Our route to consumer focus, momentum in reserve and successful innovations have each contributed to building a stronger business although lower inflation and weak economies will lead to subdued net sales growth in the current year despite these improvements," he said.

"We will continue to strengthen Diageo. We are investing in our brands, enhancing our route to consumer, introducing great innovations such as Crown Royal Regal Apple and Orijin, winning in reserve and focusing on cost and cash. We can realise Diageo's full potential and deliver our performance ambition."

City analyst Phil Carrol of Shore Capital said the performance had "clearly come in behind our and the market's expectations", but said it did not change the broader picture of broadly flat organic sales growth. "However, we do anticipate market expectations to slightly nudge down growth of 0% - 1%. We are now forecasting a growth rate of 0.3% improvement compared to 0.7% previously," he said.

"We continue to see Diageo as a business in transition," he added, noting that this would involve "further short-term pain in return for a stronger business model that could deliver more sustainable growth in the future. "The issue at present is that the short-term pain seems to be going on longer than many investors anticipated and it would appear there is still some way to go yet."

Diageo also announced a number of changes to its executive committee.

Andy Fennell, the President of Diageo Africa and former Global President for Smirnoff and Chief Marketing Officer, is leaving the company after 18 years and will be replaced by John O'Keeffe, managing director Guinness Nigeria. Former Unilever and Carlsberg executive Soren Lauridsen has been appointed to head up Guinness Nigeria from June.

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