Alcohol stocks slump as Chinese sales fall
Remy Cointreau says it was 'adversely affected' by China's anti-extravagance policy.
Shares of major drink makers got battered on Thursday after poor results from Diageo (DEO) and Remy Cointreau, stemming from the Chinese economic slowdown, caused a sell-off.
Remy Cointreau fell 3.8 percent and Diageo fell 4.5 percent after the companies reported earnings. Other drink makers were also dragged down, with Pernod Ricard (PDRDY) lower by about 3.6 percent.
Remy Cointreau, maker of ultra-premium cognac Louis XIII, blamed China for a 13.5 percent decline in sales for the year ending March 31 to 1.03 billion euros ($1.43 billion).
Remy said it was "adversely affected" by the Chinese government's "anti-extravagance policy, which had a negative impact on the consumption of premium spirits."
The company added that "the decline in sales was intensified by the group's desire to reduce inventory levels in its Chinese distribution channels. This effort gathered significant momentum during the second half of the financial year."
Sales of Remy's popular cognac, Rémy Martin, dropped 20 percent. The company warned it could see a decline of between 35 and 40 percent in current operating profit for the 2013/14 financial year.
Meanwhile, Diageo, known for its high-end cognac Hennessey, reported weak organic sales growth of 0.3 percent in the nine months ending March 31, and posted a 1.3 percent drop in the third quarter of 2013. While the company saw growth in North America, Russia and Latin America, Diageo said sales in Asia-Pacific tumble by 19 percent in the three months to March 31.
Authorities in China have been clamping down on gift-giving among public officials, corruption and exuberant living. This has had a major effect on high-end drinks makers and luxury brands. Many companies thought the slowdown would be a temporary blip, but analysts said the landscape has changed.
"It's the end of the boom as it used to be, which was driven by business entertainment and ultra-premium drinks," Trevor Stirling, European beverage analyst at Sanford Bernstein, told CNBC in a phone interview.
While the ultra-premium liquor story in China may be over, opportunities now lie in creating a more diversified market, according to analysts.
"China will return to growth but it will be driven by private consumption and span a range of price points," Stirling said.
With China slowing down, drinks giants are turning towards other emerging markets, with India being a key country.
"The current emerging market weakness does not reduce our confidence in the long-term growth opportunities of these markets and we have continued to invest to build our brands and routes to consumer for the future," Diageo CEO Ivan Menezes said in a press release after the company reported earnings.
On Tuesday, Diageo launched a $1.9 billion bid to almost double its stake in India's United Spirits, hoping to bank on the emerging middle class in the country.
According to Jonny Forsyth, drinks analyst at market research firm Mintel, Diageo is well-placed to be successful in India. He added that the short-term hit to drinks companies would be offset by long-term growth.
"India provides 50 percent of whiskey sales in the world, and India is at a stage where it is very likely that tariffs on foreign imports will come down, which will completely open up the market. So if Diageo can really get in poll position, they are just going to be in a fantastic position for the next 10 or 20 years," Forsyth told CNBC in a TV interview.
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