Diageo still nursing emerging markets headache

Diageo reported an unexpected sales decline in its third-quarter as the maker of Guinness beer, Smirnoff vodka and Johnnie Walker whisky continues to struggle with its emerging markets hangover.

The FTSE-100 listed drinks manufacturer reported a slowdown in its Europe, Asia and Latin America businesses, with net sales in the three months to March 31 missing analysts' expectations in every region, falling 0.7 per cent.

Analysts polled by Bloomberg had been expecting total organic net sales growth of 2 per cent. In January, Diageo had reported a 23 per cent fall in half year pre-tax profits to £1.6bn although it had raised hopes at the time that the outlook for the second-half of the year was more optimistic.

North America sales rose 0.9 per cent, with the impact of lower fuel prices boosting consumer confidence yet to translate into greater alcohol sales for the group.

Europe sales fell by 1.3 per cent, hurt by a high single-digit sales decline in the UK due to tough comparisons with the prior year, after retailers had boosted inventories ahead of an expected duty increase.

Despite an 8.2 per cent sales rise in Africa, the biggest declines during the quarter came in Diageo's frontier markets, where it has focused growth efforts in the wake of the financial crisis. Latin America and Caribbean sales slipped 10.2 per cent - while organic net sales in the Asia Pacific fell 6 per cent.

"Our performance in the quarter reflects continued tough conditions in the emerging markets and subdued consumer demand in some developed markets," said chief executive officer Ivan Menezes on Thursday, adding that the company had taken a £298m adverse hit from negative currency movements during the nine months to March 31.

Lower inflation and weak economies will lead to "subdued net sales growth" this year, he said.

Francois Mosnier, Exane BNP Paribas analyst, said: "This quarter will do nothing to rebuild market confidence."

"Destocking was stronger than we expected in Asia and Latin America, and another devaluation in Venezuela took its toll."

The world's largest spirits company has been grappling with several sobering setbacks in recent quarters that have taken the fizz out of developing market sales.

In China, sales of expensive cognac, baidu and whiskey have fallen sharply in the wake of president Xi Jinping's anti-corruption drive. And earlier this month, a clampdown by the Indonesian government on sales of drinks with less than 5 per cent alcohol volume in smaller stores was launched, hitting beer sales in the world's fourth most populous country.

Diageo said on Thursday that the regulatory changes in Indonesia, coupled with retailers across Southeast Asia reducing inventory had weighed on its performance in the region.

Last August, the group reported its lowest annual sales and profits in three years, predominantly due to challenges in emerging markets. Thursday's quarterly report is the last of its kind for Diageo, which will do only half-year reporting from next financial year. Shares had risen 2 per cent during early trading in London to 116,89p.

By contrast, Diageo rival SABMiller, manufacturer of beer brands including Peroni and Miller Lite, said on Thursday that its forecast-beating fourth quarter figures had been lifted by improvements in its Asia, Latin America and Africa businesses, particularly South Africa, Mozambique, Colombia and Peru.

Overall, beverage volumes climbed 4 per cent in the quarter - compared to a 1.4 per cent forecast by analysts - and 1 per cent for the year. But the company said a 2.7 per cent decline in US domestic sales, coupled with reduced European lager sales in the wake of the ongoing crisis in Ukraine, had caused headaches in more established markets.

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