Chinese baijiu spirits knock profits at Diageo

Bottles of whisky on display in the Diageo Claive Vidiz Collection (GETTY IMAGES)

The maker of Guinness stout, Johnnie Walker whisky and Smirnoff vodka has been hit by its foray into China’s local spirit sector as profits tumble.

Diageo said it is committed to its emerging markets businesses despite the drinks giant reporting a 10 per cent tumble in full-year operating profit to £3.13bn and a 9 per cent fall in net sales, with organic sales up just 0.4 per cent.

The group was hit by currency devaluations against the strong pound, a £264m writedown of its Chinese spirits business and a tax issue in Kenya.

The company had previously bought up a raft of local drinks brands in countries such as Turkey, China, Brazil and Ethiopia and revealed that its Chinese baijiu spirit business, Shui Jing Fang, suffered a 78 per cent sales decline during the year.

Like sales of watches and cognac in China, baijiu drinks — which are often drunk at banquets — have been hit by the government crackdown on gift giving and ostentatious spending. Diageo has introduced cheaper brands within its Shui Jing Fang business to off-set the price competition in the sector. Its bottles sold for around £100 but it has been introducing brands that sell for around £40-£50 a bottle. The baijiu drinks sector makes up 60 per cent of the Chinese spirits market and the group expects Chinese New Year to be a key driver of recovery.

Diageo’s chief financial officer Deirdre Mahlan said the baijiu drink is “totally imbedded in the culture and lifestyle” in China and “consumed with meals” so it will continue to be a huge business. She said Shui Jing Fang has been rebased Diageo expects it to return to growth.

Ivan Menezes, who has Diageo’s chief executive for a year, admitted: “This year has been tougher than expected but we are now a leaner, faster paced business and we start the new year in good shape.”

Diageo’s high-end spirits business performed well globally: reserve brand sales rose 14 per cent, with double-digit growth in every region and sales up 29 per cent in Britain.

Analysts at RBC Capital Markets said: “With organic revenue growth for the year in line with consensus expectations at 0.4 per cent, this was not a vintage set of results from Diageo, but in the context of recent hiccups it counts as satisfactory in our opinion.”