Diageo, the world’s leading spirits company and home to renowned brands such as Johnnie Walker, Gordon’s, and Smirnoff, has maintained a reputation for growth and success over the past decade. However, the company has faced challenges in the last 12 months, reporting a decline in annual sales for the first time since the 2019-2020 financial year due to the impact of COVID-19 on the hospitality industry and duty-free sales.
The company’s sales for the year ending in June were $20.3bn, a 1.4% decrease from the previous year. Adjusting for foreign currency movements, underlying sales were down 0.6%. This led to a 5% decrease in underlying operating profits, although headline profits showed an 8% increase due to a one-time gain from reversing an impairment on the Chinese brand Shui Jing Fang.
The news of the decline in sales caused a drop of over 10% in Diageo’s share price, resulting in a loss of £6.5bn in market value. The company attributed this decline to a weaker performance in the Latin America and Caribbean region, which accounts for 8% of its sales, as well as a cautious consumer environment in North America, its largest market.
Debra Crew, Diageo’s chief executive, expressed confidence in the company’s ability to overcome these challenges and return to growth. She stated, “I believe these challenges are temporary and that the consumer environment will recover over time. We have navigated volatility before, and we will do it again.”
Crew, a former intelligence officer in the US military, highlighted Diageo’s market share growth in the past six months and overall market share in markets representing over three-quarters of its sales. She also noted that all of the company’s major brands have maintained or grown their market share.
However, Diageo has faced specific difficulties in certain regions. In Latin America and the Caribbean, the company’s sales were impacted by an oversupply of inventory in countries like Brazil and Mexico, leading to a decrease in demand for premium brands. Crew assured investors that the situation has since improved, with market share gains in Brazil and more appropriate inventory levels in Mexico.
The company’s biggest concern is in North America, where consumers have returned to normal spending patterns after a period of splurging on premium spirits post-lockdown. Additionally, inflation has caused consumers to shift to cheaper brands, resulting in a 22% decline in sales for Diageo’s premium tequila brand, Casamigos. Despite this, Crew stated that Diageo is still gaining market share in the North American tequila market through stronger sales of Don Julio.
There were some bright spots in the company’s results, with market share growth in nine out of its 10 largest markets for Scotch whisky, its top-selling category. Crew emphasized the success of Johnnie Walker, the world’s biggest spirits brand, and the company’s focus on expanding its single malt market share with brands like The Singleton.
Diageo also saw positive sales growth for Guinness, with a 15% increase in global sales and market share gains in its top three markets – the US, Great Britain, and Ireland. Crew highlighted the brand’s growing popularity among female drinkers and its partnership with the Premier League. The company’s goal is to reach a 6% share of the global alcohol market by 2030, up from its current 4.7%.
Crew remains confident in the long-term growth potential of the industry, citing demographic trends, rising incomes in developing countries, and a shift towards premiumization. However, in the short term, the company faces headwinds from a normalization of consumer behavior post-pandemic and cautious spending due to global inflation.
Commenting on the company’s outlook, Chris Beckett, head of equity research at Quilter Cheviot, stated, “Guidance remains vague and doesn’t provide much optimism for a swift turnaround.”
While Diageo is not alone in facing challenges in the current economic climate, with recent disappointing updates from companies like Heineken and McDonald’s, investors are eagerly waiting for a turnaround in consumer confidence and spending.
