By Tripp Mickle And Saabira Chaudhuri
The Securities and Exchange Commission is investigating whether
Diageo PLC has been shipping excess inventory to distributors in an
effort to boost the liquor company's results, according to a person
familiar with the inquiry.
By sending more cases to distributors than wanted, the
British-based owner of Smirnoff and Johnnie Walker would be able to
report increased sales and shipments, according to these
people.
Diageo on Thursday confirmed to The Wall Street Journal that it
received an inquiry from the SEC regarding its distribution in the
U.S.
"Diageo is working to respond fully to the SEC's requests for
information in this matter," a company spokeswoman said.
Following The Wall Street Journal report on the investigation,
Diageo's American depositary receipts fell 5.2% to $113.40 in
afternoon trading.
The inquiry coincides with a period of tumult in Diageo's
executive ranks. Diageo announced in June that North American
President Larry Schwartz would be retiring by the end of the year.
Since then, the company also has announced the departures of its
chief marketing officer for North America and a president of
national accounts in the U.S.
It recently named Deirdre Mahlan, currently chief financial
officer, as president of Diageo North America.
The North American region is the largest and most important to
Diageo's bottom line. It accounts for about a third of its $17.58
billion in sales and around 45% of operating profit. Volumes
decreased 1% last year, but price increases helped sales rise 3% to
about $5.34 billion.
Diageo--which reports full-year results next week--has suffered
through a period of slumping sales in the U.S., its largest market,
with organic net sales dropping to 3% in 2014 from 6% in 2012. The
company raised prices under former Chief Executive Paul Walsh, and
its U.S. market share has declined every year between 2011 and
2014, according to Exane BNP Paribas.
Diageo's blockbuster Smirnoff brand has struggled as consumers
grew tired of flavored vodka. Interest in Captain Morgan also has
waned, and the rum isn't one that is palatable as a shot, a trend
that has grown in popularity of late. Diageo also lost market share
last year in Canadian whisky as its Crown Royal brand adapted to
the flavored whiskey trend later than rivals.
In the U.S., liquor producers follow a three-tier system to
market. Producers like Diageo ship to wholesalers, who then ship to
retailers. Liquor companies can record shipments as sales when they
ship them to the wholesaler.
Diageo Chief Executive Ivan Menezes said during a call with
analysts in January that the company has shifted its focus from
shipments, which reflect sales to distributors, to depletions,
which reflect sales from distributors to retailers. He said the
company was reducing the level of inventory distributors carry to
get "better visibility on customer depletions."
Pernod-Ricard, the world's second-largest publicly traded liquor
company, emphasizes depletions during earnings reports and uses
that as a benchmark for performance. Brown-Forman Corp., the
largest publicly traded U.S. spirits company, measures its volume
performance with depletions.
Diageo has about a 20% share of the U.S. spirits market,
according to the industry tracking service Impact Databank. It
became the market leader after Mr. Menezes's predecessor, Paul
Walsh, exited businesses like Burger King and Pillsbury and focused
on alcohol, scooping up Seagram Co. brands Captain Morgan and Crown
Royal in a $5 billion deal.
Write to Tripp Mickle at Tripp.Mickle@wsj.com and Saabira
Chaudhuri at saabira.chaudhuri@wsj.com
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