The world’s largest producer of spirits, Diageo, confirmed to the Wall Street Journal that the Securities and Exchange Commission (SEC) is investigating the company for shipping distributors more inventory than they desire in an effort to boost sales totals. The British-based company manufactures many popular brands such as Smirnoff, Crown Royal, Captain Morgan, and Johnnie Walker, among others. The SEC declined to comment, but the company released a statement, saying “Diageo is working to respond fully to the SEC’s requests for information in this matter.” CEO Ivan Menezes announced in a January conference call that the company had moved away from counting shipments in North America’s three-tiered accounting system, instead moving to depletions, which are sales from distributors to retailers.
The news comes after North America’s regional President Larry Schwartz announced last month that he will be retiring at the end of the year. Since Schwartz’s announcement, two additional North American executives have left the company as well. Current CFO, Deirdre Mahlan, has been appointed to serve as the president of Diageo’s North American operations, the company’s most important region. Mahan will take over as soon as a new CFO is found to take her place. North America accounts for a third of sales and 45 percent of Diageo’s operating profit. The company reported $15.9 billion in overall earnings in 2014. According to Exane BNP Paribas, sales have declined every year in North America since 2011, although price increases afforded the company a 3 percent growth in revenue in 2014. Menezes’s predecessor, Paul Walsh, steered the company into a market leadership position after acquiring Seagram’s brands, Captain Morgan and Crown Royal in a $5 billion deal.
The investigation could not come at a worse time for the company. Consumer demand in brand leaders Smirnoff and Captain Morgan has declined, and North American sales overall are down by 1 percent. Coinciding with Schwartz’s announcement, Brazil’s richest man, billionaire Jorge Pablo Lemann has considered a takeover of the company. Lemann led the largest brewery merger in history, combining his AmBev with Belgian company, Interbrew to become the world’s largest beer company. Raising the stakes, the company will also announce its second-quarter earnings next week, and likely face intense questioning regarding the SEC probe by shareholders as well as the media. According to Yahoo Finance, early trading on Friday saw the company get off to its worst start in three months, a three percent decline in the wake of the news of the SEC probe. Diageo had a prior run-in with the SEC in 2011, agreeing to a $16 million penalty for illegal payments of $2.7 million to foreign officials in order to gain sales and tax benefits.
CNBC – Reuters
The Guardian – Dominic Rushe
Wall Street Journal – Tripp Mickle and Saabira Chaudhuri