Slowing Demand In Emerging Markets Hits Diageo plc

Claive Vidiz whisky collection

The shares of Diageo (LSE: DGE) (NYSE: DEO.US) dropped 4.7% to 1820p this morning after the global drinks giant announced cost-cutting plans following slowing demand in emerging markets.

Diageo, which owns Guinness and Smirnoff, will cut costs by £200 million a year until June 2017 in order to fund investment in growth and improve margins.

The FTSE 100 member posted a net sales growth of 2% for the six months to December 31. Spirits form 70% of Diageo’s net sales and also grew 2%. This was due to sales in North America while in emerging markets — previously a strong growth driver — sales were flat due to volatility.

Overall beer was the only drinks category where sales declined. The 2% fall was partly sparked by challenging conditions in Africa, such as the impact of excise duty in Kenya.

Ivan Menezes, the chief executive, had the following to say:

“We have continued to demonstrate the strength of our broad portfolio and diverse global business in a period which saw a more challenging emerging market environment. Sustained performance in the US and improved performance in Western Europe enabled Diageo to absorb the current challenges in some of our emerging markets.”

Today’s first-half results reflect the first six months in charge for the chief executive.

Prior to today, City experts were expecting Diageo’s upcoming annual results to show earnings per share of 114p . Following today’s price movement the shares may therefore trade on a P/E of 16 and offer a potential income of around 2%. 

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> Mark does not own shares in Diageo.