Diageo admits Smirnoff lost US share to discounted rivals over the last half year as lower-income spirits drinkers continue to suffer from an ‘uneven’ economic recovery.
Reporting ‘challenging’ numbers for the six months ending December 31 today, Diageo grew its overall US sales 4.6% but rued the impact of Chinese government ‘anti extravagance’ measures.
The government anti-corruption campaign launched in Q4 2012 has hit high-end spirits sales, given their consumption in gifting, dining and entertainment involving government officials.
CEO Ivan Menezes said the spirits firm’s H1 was also hit by destocking in Southeast Asia, where volumes fell 15%, with a significant tax increase raising Thai retail prices 15-20%.
Net sales fell 1% on a reported basis year-on-year to £5.93bn ($9.78bn) and volumes measured in nine-liter case sales fell 5% on the same basis to 84.3m – but net profit rose 5% to £1.599bn.
Stopping the Smirnoff slide
Diageo attributed its US growth to premium and above brands, citing Johnnie Walker Platinum and Johnnie Walker Blue as good examples delivering £25m+ net sales growth in H1, while Bulleit and Don Julio together drove a third of sales growth.
But Smirnoff suffered in the standard category as lower-income consumers traded down as Diageo’s competitors discounted prices.
“Innovation is helping to mitigate some of this, but to regain share and increase our pricing strength we are working on a new communications platform that will enhance the brand’s credentials with consumers,” Menezes said.
Diageo’s top line fell 6% in Asia Pacific despite Baileys sales up 37% in China, net sales up 35% in India and Captain Morgan’s strong performance in Australia (+81%).
Asia Pacific accounts for 13% of net sales by region for Diageo, the lowest share amongst its five territories (North America, 32%, Western Europe, 20%, Africa, Eastern Europe and Turkey, 20%, LATAM, 15%) but is clearly a vital growth region for global spirits players.
New products at lower price points
While she described sorghum-distilled spirit baijui’s performance in China as “very weak”, CFO Deirdre Mahlan said Bailey’s and super and ultra-premium Scotch had delivered strong growth and share gains in the first half year.
Johnnie Walker Black and Red Label shipments fell while Black and Double Black depletions rose slightly; super and ultra-premium Johnnie Walker brands grew double-digit and gained share.
Mahlan said Diageo had managed stock levels in its wholly owned native distiller SJF Holdco (which makes baijiu brand Shui Jing Fang) and even taken back stock and written it off, while launching new products at lower price points.
“I think Chinese New Year is unlikely to see a rebound but we have taken all the steps to rebase the business for growth in calendar 2015,” she said.
Bespoke scotch blends
During a later press conference with journalists, Menezes discussed cuts in gifting and entertainment due to austerity measure, but said Shui Jing Fang was more of a consumer franchise.
"However as the total market shrank, the big players actually cut prices and there is a lot of stock in the system.
"So the overall category is going through a correction, which is why as I said it will take us through 2015 to get it back into growth," he said, while emphasizing the health of the baijiu category.
Switching to super-deluxe scotch, Menezes said Diageo has a lot of tailored products, with bespoke blends selling at $3,000-5,000/bottle and Johnnie Walker Blue up about 60% in the half.
"I feel very good about the way in which we are building the top end of our scotch whisky business [in China] and it’s still a relatively small business, but it’s growing fast and brand equity on Johnnie Walker is extremely strong and doing very, very well," he said.