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Chinese abstinence hits drinks firms Diageo, Remy

A signage is seen on the outside of Diageo offices in west London in this October 10, 2008 file photo. REUTERS/Toby Melville/Files
A signage is seen on the outside of Diageo offices in west London in this October 10, 2008 file photo. REUTERS/Toby Melville/Files

By Martinne Geller

LONDON (Reuters) - China's crackdown on corruption, and with it luxury gift-giving, has again hit quarterly sales of spirits, European drinks groups Diageo Plc and Remy Cointreau SA said on Thursday.

In contrast, brewer SABMiller Plc said sales of lager in the last three months jumped 10 percent by volume in China, one of the markets that helped the maker of Peroni and Grolsch beers post a 6 percent rise in net sales by value, up from a 2 percent rise the previous quarter.

"We see this as a solid result in tough market conditions," said Numis Securities analyst Wyn Ellis.

Stifel Nicolaus analyst Mark Swartzberg also said SABMiller was "navigating better than Diageo".

Diageo, the world's biggest spirits company as well as the maker of Guinness and Red Stripe beers, posted a 3.1 percent rise in sales for its first quarter, ended September 30, which analysts said fell short of their expectations for a 4 percent rise. Sales rose 5 percent in the previous quarter.

Meanwhile Remy, which generates 40 percent of its operating profit from cognac sales in China, said wholesalers were reducing inventories after sales fell short of expectations during the Chinese New Year.

Remy said revenue declined 5.3 percent on a like-for-like basis to 294.4 million euros ($397.2 million) in the three months to September 30, its second quarter, compared with a 2.

Remy's shares were down 3 percent at 71.48 euros by 1239 GMT, when shares in Diageo were up 0.3 percent at 1944 pence and shares in SABMiller were up nearly 4 percent at 1358 pence.

Despite the slowdown in the last three months, Diageo stood by its medium-term outlook calling for annual sales growth of 6 percent.

But several analysts questioned whether the maker of Johnnie Walker whisky and Smirnoff vodka would be able to meet it.

"We would be skeptical of Diageo delivering that ... and expect consensus sales estimates to drop," said analysts at Liberum Capital.

While Diageo's sales in the last quarter rose 10.9 percent in Latin America and the Caribbean and 5.1 percent in North America, they grew only 1.3 percent in Africa, Eastern Europe and Turkey and 0.6 percent in Asia Pacific - markets whose growth drinks firms have been relying on as austerity-hit Western Europe struggles.

Sales in Western Europe fell 1.1 percent. Other particular problem areas were Russia, where the company faced tough comparisons with double-digit growth a year ago, and Nigeria and Ghana, which the company said should improve later this year.

EXCHANGE RATES

A recent weakening of various currencies against the U.S. dollar has also hit results. Diageo, which made a net profit of 2.59 billion pounds ($4.13 billion) in the year to June 30, said that, based on spot rates, foreign exchange factors would reduce 2014 operating profit by 165 million pounds.

SABMiller also said foreign exchange would hurt its results, but noted that its financial performance was in line with expectations.

In the quarter ended September 30 revenue rose 4 percent in Latin America, 3 percent in North America and 5 percent in Asia/Pacific. It rose 12 percent in Africa and was flat in Europe.

"Despite current prevailing uncertainties about developing market economies, we remain confident in the long term growth prospects for the group," said Chief Executive Alan Clark.

(Additional reporting by James Regan in Paris; Editing by Kevin Liffey and Greg Mahlich)

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