Diageo warns on effect of Chinese crackdown The Chinese government's high-profile crackdown on conspicuous consumption depressed sales at Diageo, the drinks maker, which reported lower than expected profits for the second half of last year. The maker of Smirnoff vodka, Guinness and Johnnie Walker whisky also warned sales in Nigeria, traditionally a strong emerging market, disappointed. The operating profit before exceptional items for the second half of last year rose 2.9 per cent to £2.06bn but net sales fell 0.7 per cent to £5.93bn. Organic net sales, which exclude currency moves and acquisitions, rose 2 per cent. Analysts surveyed by Bloomberg had expected operating profit to grow by about 4.9 per cent and organic net sales to increase by 3.5 per cent. The profit figures, which were below expectations, sent Diageo's share price down more than 6 per cent at £17.92 in mid-morning London trading. The group said performance in China was particularly weak, with sales of high-end baiju, a popular local spirit, down 66 per cent amid a high-profile austerity campaign led by the president, Xi Jinping. Ivan Menezes, who took over as chief executive last July, said he expected sales to pick up over the next six months and that over the next two months he would set out detailed plans "to simplify our processes and delayer our organisation" that he expects to deliver annual cost savings of £200m by 2017. Diageo is hoping to compensate for slowing emerging market sales with stronger sales in the US, the world's most profitable spirits market, and by pushing its more expensive brands. North America and Latin America were the only areas where operating profit increased. Canaccord Genuity said in a research note that it expected top line expectations to fall further despite the strong North American results. "While those with a long term horizon may be sanguine about the organic slowdown, we think others should be cautious about [the 2014 and 2015 financial years] earnings as delivery now appears more dependent on continued and accelerating margin performance," it said. HSBC said the results bode badly for the rest of the industry. "This surprising miss may rather read negatively for the whole industry, given how scale and US exposure is supposed to act as a buffer for Diageo compared to more vulnerable peers," it said in a note. Earlier this month Diageo acquired a stake in premium tequila through a joint venture with Sean "Diddy" Combs, the US rap star, by buying 50 per cent of DeLeón tequila. Africa is also seen as a market with increasing potential. Last year Diageo, for example, launched its first cassava beer in only eight weeks as it faced increasing competition from SABMiller. In July last year Diageo reported full-year sales growth at the top end of expectations on the back of double-digit growth in emerging markets and buoyant North American sales. Its share price rose 4.7 per cent in 2013 and 29.7 per cent in 2012.