China 'gifting' crackdown takes toll on Diageo and Remy Cointreau

The Chinese government's crackdown on ostentatious consumption by officials has taken a heavy toll on sales of cognac and distilled liquor baijiu at two of Europe's leading distillers.

Diageo, the maker of Johnnie Walker scotch and Smirnoff vodka, on Thursday posted a sales drop of almost a fifth in Asia-Pacific in the third quarter, pushing the company to an overall 1.3 per cent decline in organic net sales.

The London-listed group put the 19 per cent decline in the region partly down to "weaker performance in Chinese white spirits" - a reference to baijiu, the premium liquor favoured by the country's Communist party officials that is regarded as firewater by many foreigners.

Remy Cointreau, the Parisian spirits and liquor company, meanwhile said cognac sales had fallen 32.3 per cent in the fourth quarter, having decreased by a similar amount in the prior three months, amid the austerity drive across China.

Overall, like-for-like sales declined 16.1 per cent year on year at the maker of Cointreau liqueur and Mount Gay Rum, and the company warned that full-year operating profit would plunge by between 35 per cent and 40 per cent.

Chinese president Xi Jinping has made it one of his top priorities to crack down on government extravagance and corruption, which has curbed "gifting" - the practice of business executives offering luxury gifts to curry favour with officials, who increasingly dare not accept them.

This has had an effect on the entire consumer goods industry, from Swiss watchmakers to premium carmakers, such as Bentley.

The 1.3 per cent sales decline at Diageo in the three months to the end of March came despite analyst expectations for a 1 per cent rise. The company said the decline had also been affected by political instability in Thailand, as well as the use of a higher exchange rate for business in Venezuela.

Diageo, which makes 15 per cent of its sales in the Asia-Pacific region, said currency and economic weakness in developing economies had also hit consumer confidence.

Ivan Menezes, chief executive, said: "In the emerging markets currency volatility and caution about the outlook for GDP growth are negatively impacting business and consumer confidence."

Africa, eastern Europe and Turkey sales declined by 5.2 per cent, but there was better news in Latin America and the Caribbean, where Diageo's sales grew 27.7 per cent in the third quarter. North America and Western Europe was up by 1.2 per cent.

Diageo shares opened down 3.8 per cent in London at £18.27, while Remy Cointreau shares fell 6 per cent to €59.19 in Paris.

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