Diageo sales in India get instant boost from USL distribution

It net sales grew 35% for the period in India against an average 1.3% growth in all emerging markets combined

Even as a slowdown in emerging markets has taken its toll on the first half of Diageo’s current financial year ending in June, India continues to deliver strong growth to the UK-based world’s largest distiller. The company said it net sales grew 35 per cent for the period in India against an average 1.3 per cent growth in all emerging markets combined.

“India’s sales growth was partly driven by share gains and initial distribution gains, resulting from our sales promotion agreement with United Spirits Ltd,” the company said.

Starting October 2013, the maker of Johnnie Walker scotch whisky and Smirnoff vodka began distributing its brands through 65,000 outlets of United Spirits, India’s largest spirits maker in which Diageo bought a controlling interest. It currently has 26.37 per cent in the Indian liquor giant.

“Associate income was up £41 million, driven by growth in income from Moët Hennessy and the inclusion of United Spirits,” Diageo said.

About 42 per cent of Diageo’s sales come from emerging markets, where a slowdown led to a 1.8 per cent tepid rise in overall net sales in the first half of its financial year, following a rise of 2.2 percent in the first quarter of the year.

“The (Asia Pacific) region faced some specific challenges. Chinese white spirits declined significantly due to the anti-extravagance measures and South East Asia was impacted by weakness in some markets and channels, including Thailand,” according to Gilbert Ghostine, President, Asia Pacific.

The company said momentum continued on scotch as Johnnie Walker net sales grew 87 per cent in India, contributing to almost half of India’s growth. That compares to a global decline in net sales of its flagship Johnnie Walker brand of Scotch whisky.

In all, whisky accounts for 36 per cent of Diageo’s net sales and contributes  to over half of total net sales growth while Scotch registered net sales growth of 2 per cent despite volume decline of 4 per cent. Diageo’s Smirnoff vodka too saw net sales grow in double-digits due to “increased focus on flavours” and its new marketing campaign.

“We saw strong growth in India and started to see benefits from the USL sales promotion agreement that we have put in place. Organic operating margin improved as we increased focus on driving cost efficiencies, with a significant reduction in overheads,” the company added.

Diageo has also said it plans to cut costs by £200 million a year until June 2017, to alleviate the effect of the slowdown in key emerging markets.
As India gains more prominence on the emerging market map for Diageo, a part of the company’s interest in United Spirits Ltd has been threatened by a Karnataka High Court ruling that struck down a sale of about 7 per cent (from UB Holdings) of the total purchase.

While Diageo has appealed that decision in the Supreme Court, it said it continues to pursue the completion of the acquisition of an additional 2.38 per cent shares in the company pledged by from the USL Benefit Trust. “Currently certain lenders to USL are refusing to release security that they hold over those shares notwithstanding that they have been repaid in full,” the company said. The matter is currently being battled in the High Court.

“If it is not ultimately possible to complete the acquisition in relation to these shares, they would instead continue to be held by the USL Benefit Trust subject to an undertaking that the trustees would only vote the shares at the direction of USL,” Diageo said.