Diageo confident as challenges persist

Diageo CEO Ivan Menezes has told investors to expect an improved performance this year, despite the company reporting a 1.5% decline in organic net sales for its first quarter.

Following a £1.1 billion sales slide in 2013/14, the group described its figures for the first three months of its new financial year to the end of September as “in line with expectations”.

In Europe, sales were impacted by declines in Russia and Eastern Europe, which Diageo linked to the ongoing tensions in Ukraine. Meanwhile sales in Western Europe fell by -1%, primarily driven by price increases in Benelux and “continued weakness” in the German market.

Despite a “weak” performance from Nigeria, the group pointed to positive results from its regional markets and East Africa. It also hailed a “good performance” in core domestic markets across Latin America and the Caribbean, although Brazil saw a decline in sales as a result of price increases in a number of states.

The biggest decline came from Asia Pacific, where sales fell by -7.4%. Explaining this slide, Diageo cited “the decision to reduce inventory levels in South East Asia and the continued challenging trading environment in mainland China.” However, it noted a slight improvement in this latter market, noting: “organic net sales decline there has moderated to around 20% in the quarter.”

In contrast to these problematic parts of the region, the group pointed to “good growth” from India, the Middle East and its Global Travel Asia division.

Summing up this mixed start to the year, Menezes observed: “Consumer trends in most markets are unchanged and our first quarter performance is in line with our expectations given the prior year comparison of the performance of our US Spirits & Wines business and the destock we have implemented in South East Asia.”

Commenting on the North American market, he noted: “consumer demand for mainstream brands is still constrained by weak consumer confidence in average income households while our reserve brands and our innovations continue to perform well, as they do globally.”

Meanwhile, continued Menezes, “Western Europe is now stable and I continue to expect full year performance to be flat although there will be quarterly fluctuations around that level.”

As for emerging market, he pointed to a performance that “remains weak with further currency weakness in a few markets and specific geopolitical situations in some areas.” Despite this, Menezes added: “our brand performance has been strong in many markets including Turkey, East Africa, India and Colombia.”

Looking ahead, he concluded: “We expect full year top line growth to improve on last year’s performance. Our focus on our six performance drivers continues to build our capabilities and deliver the cultural change I want to see across the business. I am confident we are on the road to realise our full potential.”