Diageo plc’s Chinese Mistake

Diageo plc (LON: DGE) is being forced to take a loss on its Chinese business.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

DiageoDiageo’s (LSE: DGE) (NYSE: DEO.US) expansion into China was part of the group’s much celebrated international expansion and drive into emerging markets. 

However, just two years later, after a change in Chinese government policy, Diageo is being forced to take a multi-million pound write-down on the value of its Chinese brand. 

Slumping sales

Diageo took control of Shui Jing Fang, a 600-year-old Chinese super premium wine spirit brand during 2012. At the time, Diageo was predicting that sales of the spirit would expand at 10% per annum until 2015. 

Unfortunately, Diageo’s forecasts could not have been further from the truth. 

As a result of the anti-extravagance drive of President Xi Jinping, the Chinese premier elected just after Diageo’s acquisition of Shui Jing Fang, the sales of luxury items have slumped across China. The premium spirits sector has been no different.

Sales of Shui Jing Fang crashed 66% during the first half of this year. What’s more, the Chinese spirits group expects to report a loss for the first half of the year and its chairman has resigned.

The problem is that due to the anti-extravagance drive, premium spirit makers have become locked in an aggressive price war, in an attempt to maintain sales growth. It would appear that Shui Jing Fang has failed to attract customers. 

Millions at stake

Diageo paid around £250m for control of Shui Jing Fang originally, the company then booked a gain of £124m when it revalued its stake. Writing down this stake as sales collapse could cost Diageo hundreds of millions.

The Shui Jing Fang losses are just one of the many problems Diageo is struggling with in emerging markets. According to Diageo’s management, the biggest impact to group performance this year will be the economic weakness in the emerging markets.

Still, Diageo has used emerging market weakness to increase its presence within India, where the group recently took control of United Spirits

Huge potential 

India holds huge potential for Diageo as the country is the world’s largest whiskey market in terms of volume. However, most whiskey sold within India is locally made. This local whiskey market is dominated by United Spirits and the company’s profits have soared, as India’s whiskey consumption doubled during the period 2005 to 2010.

Not only did the deal to acquire a majority share in United Spirits give Diageo access to the local Indian market, but is also gave the company s access to United’s extensive distribution network. The network will allow Diageo to distribute its own beverages, as well as United’s existing offering. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves has no position in any shares mentioned.

More on Investing Articles

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »