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Diageo hit by weaker conditions in emerging markets

The maker of Smirnoff and Guinness warned conditions in emerging markets were "more challenging" following slower growth in its Christmas quarter.

London-based Diageo, whose brands include Johnnie Walker whisky, has been impacted by China's crackdown on extravagant gifts to officials and weakness in some other markets, most notably Thailand and Nigeria.

Sales rose 1.8% across the half-year to December 31 but this was weaker than the growth rate of 2.2% recorded at the end of the first quarter.

Diageo shares fell 6% in early trading while its warning over conditions in emerging markets upset shares in those firms with an Asian focus, including Unilever, insurer Prudential and banking group Standard Chartered.

Ivan Menezes, who took over as chief executive from Paul Walsh in the summer, said demand in the United States and better trading in Western Europe enabled Diageo to absorb the challenges in some emerging markets.

He added: "We reacted quickly to the changing emerging market environment, reducing inventory levels in several key markets, which led to a weaker second quarter, and tightly managing our cost base."

Mr Menezes pledged to achieve cost savings of £200 million a year by 2017 as part of a drive to simplify and de-layer the business. More details are expected in the next couple of months.

He said that even though some markets were set to remain challenging, Diageo was was in good shape for the medium and long term.

UK net sales grew 1% over the half year, helped by strong growth for Pimm's in the good summer weather and for Captain Morgan rum.

Guinness performance was flat but price increases and competitors' pricing and promotional activity impacted Smirnoff as net sales declined 2%. The decision to hold price on Bell's meant its sales were down 21%.

Diageo was also impacted by economic challenges in southern Europe and declining Guinness sales in Ireland, with revenues down 6%. In Nigeria, consumers switched away from Guinness following the launch of rival lagers.

Across the group, operating profits before one-off items were 3% higher at £2.1 billion in the six months to December 31.

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