Chinese crackdown on graft, extravagance hits Diageo’s profits

UK-based distiller Diageo has taken a £264 million hit on profits after sales of the 600-year-old Chinese white spirit baijiu were affected by the country's crackdown on corruption and "extravagance".

The company said the value of its stake in Shui Jing Fang, which opened its first distillery in 1408, dived after sales tumbled 78 per cent in the year to 30 June amid heavy price competition from rival brands and action by the Chinese government to curb use of luxury goods by officials.

Scotch also took a hit, with Johnnie Walker Black Label sales down 28 per cent in the country.

The crackdown has affected a number of western luxury brands' hopes in the fast-growing economy, with cognac maker Rémy Cointreau and British clothing brand Burberry among those affected, a report in The Guardian suggests.

Growth in China's luxury market slowed to about 2 per cent in 2013 from 7 per cent in 2012, according to consultancy Bain.

Diageo paid £250 million for a controlling 40-per cent stake in Shui Jing Fang in 2012 when sales of luxury goods were burgeoning in China. But a change of government later that year led to a crackdown on corruption, announced by China's president, Xi Jinping, in 2013.

Overall sales at Diageo, the maker of Smirnoff vodka and Johnnie Walker Whiskey among other popular brands dropped 8.5 per cent to £13.9 billion.

Economic and political issues in Thailand and slipping sales of the iconic Guinness beer in Europe and the US also hit performance. Pre-tax profits slid 11.4 per cent to £2.7 billion as the strength of the pound against several international currencies including the Turkish lira and the South African rand also contributed to the profits fall.

Chief executive Ivan Menezes said, "Our regional performance has been mixed," but added, "The catalysts for a near-term recovery of consumer spend in the emerging markets are still weak; however the future growth drivers for this industry, its aspirational nature as consumers in the emerging markets see increasing disposable income, are undiminished."

In the UK, sales rose 2 per cent amid a strong year for Baileys, which was boosted by the Chocolat Luxe spirit which sold well over Christmas.