Diageo expects return to growth in its China business

Diageo, the world's biggest distiller, expects its business in China to return to growth as early as next year as the company overcomes austerity measures that have curtailed demand.

The drinks maker plans to boost Chinese sales by focusing on consumers that purchase liquor for their own consumption, rather than as gifts, chief executive officer Ivan Menezes said.

The government’s frugality drive has crimped demand for high-end spirits that are used for gifting and in banquets, he said in an interview yesterday in Singapore.

“The overall high-end spirit market continues to be challenging, but I’m very confident in the medium- to long-term trends in China,” Mr Menezes said.

“GDP is strong, the emerging middle class and urbanisation trends are strong. China’s very important for us.”

Chinese president Xi Jinping’s two-year crackdown on corruption and lavish spending has slowed sales for luxury goods, including premium liquor and watches.

As Xi’s campaign is broadening its reach in its third year, his battle is trickling down to the middle class.

Goldman Sachs estimated $600 billion worth of gifts, perks and other “gray income” were enjoyed by the country’s urban office workers.

Demand for western spirits, including those from Diageo, is expected to grow 3 per cent this year, compared with an estimated 10 per cent decline in the second half of 2014, according to a March 16 Goldman Sachs report.

Wine and spirits are among the top four gift choices for Chinese, according to the report, citing a Hurun survey.

Sales during China’s weeklong Lunar New Year holidays, which fell in February this year, were “a bit better than last year,” Menezes said, without providing figures.

Pernod Ricard, the world's second-biggest distiller, said its sales volumes during the holiday period rose 7 per cent, helped by lower-priced cognac varieties.

China currently accounts for 1 per cent of the group’s £10.3 billion in revenue, Mr Menezes said.

Sales in the country will grow more than 5 per cent over time, he said, without disclosing a timeframe.

That will help the company’s Asia-Pacific region, which includes India, comprise 25 per cent of total sales by 2020 from the current 20 per cent, Mr Menezes said.

India and Southeast Asia along with China are expected to be the growth engines for Diageo, he said.

Bloomberg