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Diageo profits watered down by stronger pound

The EU referendum was followed by a collapse in the value of the pound against the euro and the US dollar.

Since the 2016 vote, it has become commonplace for British companies deriving a big chunk of their sales in the eurozone and the US to report a boost to their profits when earnings were translated back into sterling.

The pound has, though, enjoyed a solid rebound against the dollar in particular and on Thursday passed above $1.43 for the first time since June 2016. And that is likely to lead to the opposite effect.
Diageo, the world’s biggest spirits company, offered a flavour of that when it warned that adverse exchange rate effects had clipped £134m from sales during the final six months of 2017 and £15m from operating profits.
For the full financial year, it expects the hit to sales to be £460m, and to operating profits the hit will be £60m.
The company was previously guiding the market that currencies would clip £80m from sales and boost profits by £70m.
While a £60m one-off hit to operating profits would represent a major headache for most companies, it is one that the Johnnie Walker scotch whisky, Captain Morgan rum, Smirnoff vodka and Gordon’s gin titan can take in its stride, for this is a remarkably resilient business.
Half-year sales rose by 1.7% to £6.5bn while operating profits rose by 6.1% to £2.2bn.

Image: Guinness is one of the group’s best-known drinks
That was partly due to strong growth in sales of tequila, which rose by a stunning 43%, thanks to the growing popularity of Diageo’s Don Julio brand in Mexico and the US.
Also contributing was gin, where sales rose by 16%, thanks to good growth everywhere, but especially in Europe, with both the Gordon’s and Tanqueray both doing well.
Among individual brands, though, the star performer anywhere was a drink with which few people in Britain will be familiar.
Shui Jing Fang is a leading brand of baijiu, a Chinese white spirit, likened to fire water.
Sales of the brand, which is more than 600 years old and which was acquired by Diageo in 2014, surged by a scarcely-believable 75% in the period.
Diageo took a hit in China a few years ago, when a corruption clampdown by President Xi Jinping meant fewer bottles of its premium spirits could be given as gifts to officials, but the country is now growing strongly again.
But it was not all plain sailing for the company.

Global sales of vodka were down by 3% and, while the mass-market Smirnoff fell by 1%, chief executive Ivan Menezes will be more concerned about a steeper decline in sales of premium vodkas Ketel One and Ciroc, the latter of which is promoted by the rapper Sean ‘Diddy’ Combs.

Image: Diageo enjoyed strong growth in tequila sales
There were also drops in sales for Korean scotch whisky brand Windsor, Aussie rum brand Bundaberg and the Old Parr whisky brand.
Mr Menezes will doubtless be relieved, though, to note that, Scotch whisky, the company’s most important drink category, continues to motor.
Sales were up globally by 3%, only marginally behind American whiskey, which rose by 4%.
As a global business, Diageo is a good guide to consumer spending, but – as most of its brands are at the premium end of the market – it is also a decent indicator to how social mobility is progressing around the world.
If more people are joining the ranks of the middle classes in emerging markets like India, China and Indonesia, Diageo should in theory get some of the extra money they are spending.
With sales up in Nigeria, Mexico, China, India, Brazil and Argentina, that certainly appears to be the case.
While this is a global business, with emerging markets offering the promise of stronger sales growth, mature markets like Britain are still important.
Sales in this country rose by 7%, thanks partly to the boom in gin, but also due to strong single malt sales and an extension of the Guinness brand into craft beers.
And, as Diageo prepares to enjoy the annual sales lift for whisky supplied by Burns Night, Mr Menezes may even be toasting Donald Trump.
His recent corporate tax cuts was worth a one-off boost to the company of £360m – rather more than any short-term hit caused by the rally in sterling.
There may be one other cause for celebration in the near future.

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Princess Eugenie’s fiancé, Jack Brooksbank, is the UK & Europe brand manager for Casamigos, the tequila brand created by George Clooney, which was bought last year by Diageo.
It’s a fair bet the company’s single malts – and, who knows, maybe a pint or two of Guinness – will be in ready supply at the wedding reception.

Source: Sky

About Business Ideas UK

My name is Joel Bissitt. I have been an entrepreneur for 24 years and have run many small businesses across various sectors. For the last 10 years I have worked mainly within online media, franchising and small business start-ups.

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