Johnnie Walker-to-Smirnoff drinks giant Diageo has posted a sharp drop in organic volume (-29%), organic net sales (-18%) and reported net sales (-19%) for Travel Retail Asia & Middle East in the half-year ended 31 December 2019.
The decline in what is a key strategic market for the drinks company came due to challenging trading conditions on the Middle East (where domestic business resides with travel retail) and lower passenger traffic in Hong Kong, the company told The Moodie Davitt Report. Diageo has also suffered in recent times from a sharp reduction in business with Heinemann (and certain distributors) and China Duty Free Group after disputes with both retailers that are now being gradually resolved.
Diageo Chief Executive Ivan Menezes added: “These results reflect the changes we are making in the business to drive shifts in our culture. They are in line with our current mid-term guidance and have been delivered in the face of increased levels of volatility in India, Latin America and Caribbean and travel retail.”
In its overall results for the six-month period, Diageo posted +4.2% rise in reported net sales to £7.2 billion (US$9.5 billion). Reported operating profit increased by +0.5% to £2.4 billion (US$3.2 billion); this was driven by organic growth offset by unfavourable exchange, exceptional operating items and acquisitions and disposals.
All regions contributed to broad-based organic net sales growth, up +4.2%, with organic volume up +0.2%. Organic operating profit grew +4.6%, ahead of organic net sales, driven by productivity benefits from everyday cost efficiencies and strong price/mix, partially offset by cost inflation and upweighted marketing investment, Diageo said.
From a category perspective, all categories except vodka (down -1%) and Scotch whisky (flat) reported an increase in organic net sales. The Scotch category was impacted by decreased Johnnie Walker organic volume (-5%), organic net sales (-4%) and reported net sales (-3%).
Diageo Chief Financial Officer Kathy Mikells added: “Net sales growth continued across key categories apart from vodka. Scotch net sales were flat as growth in malts and Buchanan’s was offset by Johnnie Walker softening due to challenging trading conditions in Mexico and Travel Retail and political and economic disruptions in Peru and Chile, which are all big scotch markets. Outside of these specific markets, scotch performance was strong, growing mid-single digit.”
Commenting on the wider results, Menezes said: “Diageo has delivered another good, consistent set of results in the first half, with broad-based organic net sales growth across regions and categories. We have continued to increase investment behind marketing and growth initiatives while expanding organic operating margins.
“During the half, we returned £1.1 billion (US$1.45 billion) to shareholders via share buybacks, as part of our plan to return up to £4.5 billion (US$5.94 billion) of capital to shareholders for the period Fiscal 20 to Fiscal 22. We have also delivered another half of solid free cash flow at almost £1 billion (US$1.32 billion).
“There is ongoing uncertainty in the global trade environment and we would not be immune from further policy changes. We remain focused on building the long-term health of our brands, supported by data-led insights and a culture of everyday efficiency. With the consumer at the heart of the business and with greater agility and discipline in the execution of our strategy, we are growing Diageo in a consistent, sustainable way.”
Mikells added: “I would note that we would not be immune from significant changes to global trade policy as well as the evolving coronavirus situation in China, and we continue to monitor both closely. Regarding China, there will be an impact on this year’s performance. However, at this stage, we’re unsure of the scale.”
