Crackdown in China hits Rémy and Diageo

A corruption crackdown by the Chinese government on the practice of “gifting” expensive spirits is hitting sales at leading drinks companies, trading updates from Diageo and Rémy Cointreau revealed today.

Spirits and luxury goods have long been used to oil the wheels of Chinese bureaucracy, but fighting corruption among officials has been a priority of President Xi Jinping in his first year in office.

Diageo, maker of Johnnie Walker whisky and Smirnoff vodka, said today that Chinese government policies had “led to a substantial fall in net sales” at the company’s white spirit subsidiary Shuijingfang. France’s Rémy Cointreau, maker of Rémy Martin cognac, Cointreau liqueur and Mount Gay Rum, also said it “expected to remain adversely affected by certain measures taken in China”.

Sales of Rémy Martin cognac fell 8.3 per cent in the quarter to September with wholesalers still looking to offload unsold stock. Rémy generates about 40 per cent of its operating profit from cognac sales in China.

Diageo, which also makes Guinness, said its suite of upmarket brands including Cîroc, Crown Royal and Ketel One vodka is still performing strongly. But it disappointed analysts with a 3 per cent rise in sales in the three months to September. As well as the issues in China, declines in western Europe dragged on growth in the US, where sales were up 5.1 per cent.

The mixed figures represent a difficult start for chief executive Ivan Menezes, who took over from long-serving boss Paul Walsh in the summer.

Shore Capital’s Phil Carroll said analysts had been expecting overall sales growth of 4 per cent from the business.

He said: “This was a subdued performance from Diageo that could lead to downgrades to market expectations. We expect to nudge our forecasts down.” The shares edged 5.5p lower to 1932.5p.

Rémy’s like-for-like sales declines deepened to 5.3 per centto €294.4 million (£249.5 million) over the quarter, worse than the 2.3 per cent reverse seen in the previous quarter. The company took heart from “particularly good” demand in the US and sales growth in Europe despite a “challenging economic environment”. Japan and Indonesia also saw “good growth”, Rémy said.