Diageo, the alcohol giant behind the likes of Smirnoff, Johnnie Walker, and Captain Morgan, is taking a big operating profit hit in emerging markets because of unfavourable foreign exchange rates.
The spirit giant, which also owns Guinness, put out a trading update ahead of its annual general meeting with shareholders on Wednesday and warned that profits are going to be £150 million lower than last year.
Here’s CEO Ivan Menezes:
Our outlook for this financial year included the possibility that further currency weakness could impact demand for premium spirits in the emerging markets. Therefore while currencies are weaker in these markets, we continue to believe that stronger volume growth in F16 will lead to improved top line performance and that we can deliver modest organic margin improvement. Our reported results will be impacted by adverse exchange rate movements which at current rates will reduce operating profit for F16 by approximately £150 million against last year.
Menezes didn’t break out what emerging markets Diageo is having currency troubles in but a fair guess would be China. China is a huge market for Diageo and the Chinese government cut the official exchange rate in August.
Spirit makers have been having a tough time in China recently. Western whiskeys and luxury handbags became a currency of influence in the world’s biggest Communist republic.
But for the past two years, China’s President Xi Jinping has been cracking down on corruption in Chinese government and business, and a big part of that has been stopping the bribery of officials.
Rémy Cointreau, the French high-end spirits group behind Rémy Martin cognac and Mount Gay rum, earlier this year blamed plummeting sales on the Chinese crackdown.
Aside from the currency issues, Diageo says the new trading year has started well, with the volume of alcohol sold growing in the “mid-single digits.”