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Weakness in Emerging Markets Hits Diageo’s Top Line

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Weakness in Emerging Markets Hits Diageo’s Top Line

Weakness in Emerging Markets Hits Diageo’s Top Line
August 01
11:29 2014

Diageo has reported a 10% drop in operating profit before exceptional items to £3.134 billion and net sales decreased by 9% to £10.258 billion for the year ended 30 June 2014, as the global drinks group’s top line was adversely impacted by foreign exchange factors and weakness in emerging market economies although stability returned to Western Europe. On an organic basis, net sales edged up 0.4% for the year and improved by 0.8% in the fourth quarter.

Diageo did manage to achieve an organic operating margin improvement of 77 bps for the year, driven by an increased focus on costs and efficiencies across the business and by procurement savings on marketing spend.

“This year our business has faced macroeconomic and market specific challenges that have impacted our top line performance. But we have gained share and expanded margin while continuing to invest in our brands, our markets and our people to create a stronger business that will deliver on the long term growth opportunities of this attractive industry,” explains Ivan Menezes, chief executive of Diageo. “Our regional performance has been mixed. In North America we have again delivered top line growth and significant margin expansion and our Western European business is now stable. Emerging market weakness, often currency related, but also including some specific issues, such as the anti extravagance measures in China, has led to weaker top line growth.”

Ivan Menezes, chief executive of Diageo.

He continues: “When I became CEO a year ago I aligned the business behind the key performance drivers which will deliver our strategy. We have made good progress. Reserve has performed strongly; innovation has driven incremental sales in all regions; route to consumer initiatives have been embedded across a number of markets with more to follow in fiscal 15; ruthless focus on driving out cost has driven margin improvement and we have reshaped the organisation and enhanced skills and capability across the whole team at Diageo. We have made progress in accelerating the performance of our premium core brands but these brands have been under pressure given the environment this year, although we have delivered share gains in a number of markets. The tougher trading environment this year has confirmed my view that these six priorities give the business clarity and focus.”

Looking ahead, he says: “The catalysts for a near term recovery of consumer spend in the emerging markets are still weak however the future growth drivers for this industry, its aspirational nature as consumers in the emerging markets see increasing disposable income, are undiminished. Diageo has leading brand and market positions and financial strength and our recent acquisitions have given us a strong emerging market footprint. The opportunity for Diageo to realise our full potential and deliver our performance ambition remains an exciting one.”

Since the year end, Diageo has acquired an additional 26% stake in United Spirits, the largest spirits group in India, and now holds a controlling 54.78% at a total cost of £1.84 billion. India is now Diageo’s second largest market after North America.

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