Diageo takes £264m hit after China’s luxury goods crackdown

Powered by Guardian.co.ukThis article titled “Diageo takes £264m hit after China’s luxury goods crackdown” was written by Sarah Butler, for The Guardian on Thursday 31st July 2014 11.44 UTC

Drinks maker Diageo has taken a £264m hit to profits after sales of the 600-year-old Chinese white spirit baijiu were affected by the country’s crackdown on corruption and “extravagance”.

The company said the value of its stake in Shui Jing Fang, which opened its first distillery in 1408, dived after sales tumbled 78% in the year to 30 June amid heavy price competition from rival brands and action by the Chinese government to curb use of luxury goods by officials. Scotch also took a hit, with Johnnie Walker Black Label’s sales down 28% in the country.

The crackdown has affected a number of western luxury brand’s hopes in the fast-growing economy, with cognac maker Rémy Cointreau and British clothing brand Burberry among those affected. Growth in China’s luxury market slowed to about 2% in 2013 from 7% in 2012, according to consultancy Bain.

Diageo paid £250m for a controlling 40% stake in Shui Jing Fang in 2012 when sales of luxury goods were burgeoning in China. But a change of government later that year led to a crackdown on corruption, announced by China’s president, Xi Jinping, in 2013.

Overall sales at the Smirnoff and Bailey’s maker dropped 8.5% to £13.9bn as economic and political issues in Thailand and slipping sales of Guinness in Europe and the US also hit performance. Pre-tax profits slid 11.4% to £2.7bn as the strength of the pound against several international currencies including the Turkish lira and the South African rand also contributed to the profits fall.

Ivan Menezes, chief executive, said: “Our regional performance has been mixed.” But he added: “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.”

In the UK, sales rose 2% amid a strong year for Baileys, which was boosted by the Chocolat Luxe spirit which sold well over Christmas.

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