Diageo ‘resilient’ in first half despite currency woes

Diageo has reported value sales growth of 1.8% and volume growth of 1% in the first six months of the year, with chief executive Ivan Menezes saying the company has “momentum and resilience”.

Diageo CEO Ivan Menezes said the impact of currency movements was bigger than expected (Photo: Diageo)

However the global drinks giant was badly affected by foreign exchange and the impact of disposals, which reduced net sales on a reported basis by £400m to £5.606bn and operating profit by £156m to £1.613bn.

“Despite an appreciation of the US dollar against the pound in the last few months, the devaluation of nearly all emerging markets currencies and the euro against the pound continued to have a negative foreign exchange impact on net sales which was worth 5 percentage points of growth,” chief financial officer Kathryn Mikells said.

Despite this, Menezes insisted the business had become stronger and more competitive as it delivered volume growth and a stronger top-line. Performance of its key brands also improved, he pointed out. There was growth in the top six brands, which account for 50% of the business – and also cost productivity.

“While trading conditions remain challenging in some markets, Diageo’s brands, capabilities in marketing and innovation and our route to consumer have proved resilient. I am confident that Diageo can deliver improved, sustained performance,” he said.

He said there was likely to be volume growth and margin was expected to improve “slightly” in the full financial year.

“This will set us up to deliver better momentum in F17, with productivity gains supporting margin expansion and investment in growth,” he added.

Scotch was back in growth driven by Johnnie Walker, with sales up 1% overall, and growth of 5% in Europe, Russia & Turkey, offsetting poor sales in China and the Middle East. Johnnie Walker reserve portfolio was also in double digit growth, albeit off a small base, and the company highlighted its innovation in whisky to reach new consumers.

Vodka brand Smirnoff also grew (+2%) regaining growth in the USA largely due to Smirnoff Red and new flavours. Despite the declining rum market, Captain Morgan saw sales up 3% globally, while Guinness also saw good growth of 9%.

Sales in Europe, Russia & Turkey, which accounts for nearly a quarter of the overall business (24%) grew 3%, with growth in the UK, continental Europe and France, driving European growth of 2%. One highlight was Guinness, up 4% and 5% in the UK and Ireland respectively, on the back of the innovations of ‘The Brewers Project’, along with Baileys, up 7% across the region.

However, sales across North America, which accounts for 34% of the business, fell 2%, which Diageo said was in line with expectations. Performance of key brands was still strong, the company said.

Africa also saw growth of 3% on the back of double-digit beer sales, along with Latin America and the Caribbean (up 9% by value and 4% by volume) and an improved performance in Asia Pacific, up 2%. This was driven by Australia (+2%), South East Asia (+6%), Greater China (+4%) and India (+6%), and growth of the reserve portfolio.