Today the company’s results for H1 ending December 31 2014 saw reported net sales down 1% to £5.9bn ($8.92bn) while net profit fell 18% to £1.64bn versus the same period in 2014.
In terms of net sales in H1, Menezes said Diageo’s ‘challenged’ markets – Southeast Asia, Latin America & Caribbean, Venezuela, Russia and Eastern Europe, China and Nigeria – saw net sales decline £94m, while developed markets were almost flat overall and emerging markets saw aggregate net sales up £84m.
In China Diageo said its net sales performance reflected the improved performance of its super-premium baiju brand Shui Jing Fang, with sales up 25% driven by the launch of a lower-priced premium option of the traditional Chinese sorghum-based spirit - Master Distiller's No.8.
But net sales of scotch fell 22% in country as the impact of the government’s anti-extravagance measures continue. In early 2013 new president Xi JinPing ordered an end to glitzy taxpayer-funded free lunches, or rather, baroque banquets for provincial party bigwigs, civil servants and military top brass.
This pressure on what Diageo calls the ‘traditional on-trade’ in China fed into overall cross-category volume sales down 20% on an organic basis, while net sales fell 3% on the same basis.
Consequently, brands such as Johnnie Walker and Windsor forced to compete in the ‘modern on-trade’ (bars, in the main) where scotch faces greater competition from Cognac, international spirits and baijiu brands.
“The impact of the anti-extravagance measures in China is well documented,” Menezes said. “The baijiu market has been fundamentally reshaped and the modern on-trade outlets where so much of our Johnnie Walker was sold has become intensely competitive.”
We understand that Diageo is not quite ready to call the bottom in terms of the effect of these anti-extravagance measures on its business, which Menezes said today had forced the company to radically rethink how it reached consumers in terms of channel and outlet.
Since scotch, for instance, is quite a new category for Chinese consumers, the firm is focused on developing knowledge and understanding of the category – building on the success of its Johnnie Walker houses.
In December 2012 the company opened its second Chinese house in Beijing. As you can see from the artist's rendering on the left, it’s effectively a ultra-luxurious lounge club. One that promises a small number of VIP patrons an ‘immersive’ experience – with members-only whisky vaults, special signature blends and ‘whisky inspired’ dining from an in-house chef.
In terms of building scotch understanding, Diageo launched single-grain whisky Haig Club in China in November (it was rolled-out in the US, UK and Asia Pacific) backed by celebs David Beckham and English entrepreneur and artist manager Simon Fuller.
“It is targeted at new consumers and a new occasion, and we’re piloting a new distribution approach selling through the Shui Jing Fang salesforce,” Menezes said, presumably mentioning Shui Jing Fang due to the traditional resonance baijiu holds among Chinese consumers as part of the mealtime occasion.
Reserve brand Haig Club is targeting this occasion, and Diageo believes the brand (which costs £40-45 in the UK) could gain traction in a space where Johnnie Walker, say, doesn’t fit so well.
“It is very early days and the brands is performing well, but in building this brand to its full potential we aim to go slowly and build a sustainable platform for long-term growth,” he added.
With its slightly lighter, sweeter taste profile that the company says makes it suitable as a cocktail base, Diageo hopes Haig Club will bring new whisky consumers into the category – globally and not just in China.
And to put Diageo’s Chinese struggles in perspective – the country only accounts for 1% of its global sales.