Diageo warns of hit to profits from slowdown in Latin America and Caribbean
Shares tumble 15% after drinks group says growth will slow in first half on back of worsening sales slump
Drinks group Diageo has warned that growth in operating profits will slow in the six months to the end of December on the back of a deepening sales slump in Scotch whisky in Latin America and the Caribbean, sending its shares down 15 per cent.
In an unscheduled trading update on Friday, the maker of Johnnie Walker, Tanqueray and Guinness said it expected sales in Latin America and the Caribbean to fall 20 per cent in the group’s first half, squeezing profits.
As a result, Diageo predicts “organic operating profit growth for the first half of fiscal 24 to decline compared to the first half of fiscal 23”. The share price drop left Diageo the biggest faller on the blue-chip FTSE 100 index on Friday.
“Macroeconomic pressures have worsened and that caused lower consumption and really more consumer downtrading than what the team was expecting,” said chief executive Debra Crew, addressing the slump in Latin America, where Diageo’s business is primarily in Scotch whisky.
Diageo’s largest markets in the region are Brazil and Mexico, followed by Central American and Caribbean countries. In total the region accounts for roughly 11 per cent of the value of the group’s sales, the majority of which are driven by its Scotch brands Johnnie Walker Black Label, Johnnie Walker Red Label and Old Parr.
Both the Brazilian and Mexican economies are showing better than expected growth but anecdotal evidence suggests that whisky is going out of fashion for those who can afford it, with younger drinkers favouring top-end vodka or newer offerings such as craft gin.
Eric Franco, a 35 year old museum worker in Mexico City, said whisky was appearing less frequently at parties. “I feel like it’s for slightly older people,” he said, saying he and his friends preferred beer, tequila and mezcal.
On Rio de Janeiro’s Copacabana beach, bartender Luan da Silva Cruz said Jack Daniels — owned by US group Brown-Forman — and Johnnie Walker Black Label tend to sell well. But he added that there is little demand for other brands and “among cocktails, the most popular by far is [national drink] caipirinha.”
At its last trading update in August, Diageo reported higher than expected inventory levels in Latin America and sales growth of 20 per cent in the first six months of 2023.
Crew said that because of the dampened economic environment, it had taken longer than expected to clear excess stock that was ordered when consumer demand was higher, adding that some wholesalers and retailers “may have purchased ahead of anticipated consumption” before interest rates started rising.
“With the volatility that we saw through the Covid supercycle, it’s been hard to see through what part of this was true consumption growth versus inventory increases,” she said.
Drinks groups prospered during the pandemic as consumers bought higher-end alcohol to make their own drinks at home during lockdowns. The party continued when countries reopened, but slowing sales at major drinks groups, particularly in North America, indicate that the boom is over.
Rivals including Pernod Ricard, Campari and LVMH’s wine and spirits division have all recently reported declining sales in the past quarter as consumers pushed back against price rises by trading down to cheaper brands or drinking less. Rémy Cointreau and Pernod Ricard’s shares each fell more than 4 per cent on Friday.
The gloomier outlook comes less than two months after Diageo told investors that operating profit growth would accelerate in the first half of its current financial year.
Speaking to journalists following the update on Friday, Crew, who started in the role in June, said the group expected an improvement in sales and profit growth in the second half of next year.
However RBC Capital Markets analysts James Edward Jones and Emma Letheren said: “If this is a temporary . . . then why did Diageo feel the need to up multiyear investment behind its global business? Our concern is that Diageo is facing a widespread retrenchment in premium spirits consumption caused by macroeconomic pressures around the world with an unknown end date.”