Regulation

Diageo Fined for ‘Overshipping’ to Meet Targets

The SEC says the liquor company misled investors that it was achieving growth in key performance indicators through normal customer demand.
Matthew HellerFebruary 19, 2020
Diageo Fined for ‘Overshipping’ to Meet Targets

Global liquor company Diageo has agreed to pay $5 million to settle allegations that it pressured distributors to buy excess inventory to meet sales targets in a declining market.

The U.S. Securities and Exchange Commision alleged employees at Diageo North America (DNA), the company’s largest and most profitable subsidiary, “overshipped” certain spirit brands to distributors in fiscal 2014 and 2015, allowing the company to report higher growth in financial statements for such key performance indicators as organic net sales and organic operating profit.

U.K.-based Diageo’s brands include Johnnie Walker Scotch whisky, Smirnoff vodka, Tanqueray gin, and Guinness beer. According to the SEC, the overshipping mainly involved newly launched “innovation” products.

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Without admitting or denying the findings in an SEC administrative order, Diageo agreed to cease and desist from further violations of disclosure laws and to pay the $5 million penalty.

“Investors rely on public companies to make complete and accurate disclosures upon which they can base their investment decisions,” Melissa R. Hodgman, an associate director in the SEC’s Division of Enforcement, said in a news release. “Diageo pressured distributors to take more products than they needed, creating a misleading picture of the company’s financial results and its ability to meet key performance indicators.”

During fiscal 2014 and 2015, Diageo North America accounted for about 40% of its parent’s annual operating profit and a third of its net sales. But as business began to slow amid a flagging market, employees in the sales and finance departments allegedly pressured distributors to purchase additional inventory to make up the shortfall in performance targets.

Among other things, DNA waived termination clauses for distributors who had failed to meet sales targets if they purchased additional unneeded innovation products, the SEC said.

The commission found Diageo failed to disclose to investors the financial trends that resulted from the overshipping, including the negative impact that the unnecessary increase in inventory would have on future growth.

Investors were “left with the misleading impression that Diageo and DNA were able to achieve growth in certain key performance indicators through normal customer demand for Diageo’s products,” the SEC said.

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