Diageo profit warning: Coronavirus to hit profits by £200m
Spirits giant Diageo has warned that up to £200 million may be wiped off its profits as a result of the outbreak of Covid-19 (coronavirus) in China.
The UK-based company said that it had seen “significant disruption” in its Chinese market since the end of January, which it was expecting to last “at least” into March, on the back of measure taken to minimise the impact on public health.
“Thereafter, we expect a gradual improvement with consumption returning to normal levels towards the end of fiscal 2020.”
These include bars – where the majority of consumption takes place – being shut, along with retail and hospitality outlets, while events, conferences and banqueting have been postponed or curtailed. The impact is also being felt in other countries in Asia, notably South Korea, Japan and Thailand, it added.
It estimated that operating profit was likely to be suffer a call of up to £200 million, with net sales likely to be £225m – £325m lower than expected, depending on how long the outbreaks last.
The company saw sales surge in Greater China, rising 24% in the six months to 31 December, driven by strong sales of Scotch and Chinese white spirits. The Asia Pacific region (which includes Greater China, Asia, India and Australia) accounts for around 21% of the company’ total business.
It said that while the duration and extent of outbreaks both inside and outside Asia were difficult to predict, it would continue to monitor the situation closely.
“The Covid-19 situation is dynamic and continues to evolve and these ranges exclude any impact of the Covid-19 situation on other markets beyond those mentioned above,” its statement said.
However it said it remained confident in the growth opportunities of its Greater China and Asia Pacific business.
“We will continue to invest behind our brands, ensuring we are strongly positioned for the expected recovery in consumer demand,” it said.
The drinks sector has been one of the hardest hit sectors by the coronavirus (Covid-19), as China accounts for around 35% of global luxury goods sales. Australian wine giant Treasury Wine, whose Asian business accounts for around a three quarters of its global business, issued a profit warning yesterdat, slashing its expectations for the financial year. Drinks giant Pernod Ricard also warned that the coronavirus outbreak could cause a 2% fall in its FY2020 sales as it scaled back its predictions for its operating profit growth to 3%, and Remy Cointreau abandoned any profits forecast following the political unrest in Hong Kong and slowdown in the Chinese market, which has caused its shares to lose a third of their value. However, according to stock market insights & financial analysis Ian Bezek of Seeking Alpha.com the market has overreacted to the profit warning.
See here for db analyses of the impact of the outbreak on the drinks industry.