Diageo, owner of Guinness, is the latest victim of the collapse in global consumer confidence | Business News

Few FTSE 100 companies over the last decade have been as reliable as Diageo.

The world’s largest spirits company, which produces brands such as Johnnie Walker Scotch whiskey, Gordon’s gin and Smirnoff vodka, appeared capable of increasing sales and profits regardless of economic conditions.

However, that reputation has taken a hit over the past 12 months.

The drinks giant, whose other brands include Guinness, Don Julio tequila and Baileys Irish cream, today reported its first drop in annual sales since financial year 2019-20 when the first few months of COVID lockdowns hit sales in pubs, bars and restaurants around the world, as well as duty free sales in airports.

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Sales of $20.3 billion in the year ended June were down 1.4% from the same period the previous year. Excluding the impact of currency movements, underlying sales fell 0.6%.

That meant underlying operating profits fell 5% to $5.9 billion – although globally they rose 8% due to a one-off gain following the decision to reverse an impairment on its Chinese spirits brand Shui Jing Fang.

Shares fell more than 10% on the news at one point – wiping £6.5bn off Diageo’s share market value.

The drop was mainly due to what the company called “materially weaker” performance in the Latin America and Caribbean region, which represents 8% of the group’s sales, although sales also fell in North America, the most important market from Diageo, which she attributed to a cautious consumer environment.

The big challenge for Debra Crew, chief executive of Diageo, is to convince investors that these are just short-term obstacles in the way for a company that alone is responsible for £1 in every £10 of total food and drinks from the UK. exports.

Mrs. Crew, who succeeded the deceased Mr Ivan Menezes in June last year, said today: “I believe these challenges are temporary and that the consumer environment will recover over time.

“We have navigated volatility before and we will do so again.”

Crew, a former US military intelligence officer before embarking on a career at consumer goods companies including Mars, Nestlé and Pepsico, highlighted that Diageo had enjoyed a “material improvement in market share” over the past six years. months and, for the year as a whole, maintained or increased market share in markets representing more than three-quarters of its sales.

She said all of the company’s biggest brands — those whose sales exceed $1 billion annually — have maintained or increased their market share.

So what about specific problem areas?

In Latin America and the Caribbean, Diageo was caught late last year by its wholesalers in countries such as Brazil and Mexico, who had too much stock, at a time when consumers – who had been buying aggressively after the end of the COVID – they started negotiating cheaper tequila and whiskey. brands.

Crew insisted today that Diageo had regained market share in Brazil, its largest market in the region, while in Mexico, its second largest market, stocks were now at more adequate levels.

The biggest concern, however, is North America, where, once again, consumers have returned to more normal behavior after splurging on premium spirits for a few years following the end of lockdowns. As inflation has consumed disposable income, US consumers have also opted for cheaper brands.

Surprisingly, Casamigos, the premium tequila brand that Diageo paid George Clooney and his business partners billions of dollars for in 2017, saw its sales fall 22% during the year, after having grown at an average annual rate 70% between 2019 and 2023.

Ms Crew argued, however, that Diageo is still growing share of the North American tequila market thanks to stronger sales of Don Julio.

Elsewhere in the results, there were some positives, with Diageo gaining market share in nine of its top 10 Scotch whiskey markets – its biggest single category. Ms Crew highlighted that Johnnie Walker remains the biggest spirits brand in the world.

She added: “Our focus… is to continue to build on the success of Johnnie Walker and share gains whilst building on our opportunity in single malts, where we are underdeveloped, led by The Singleton as our number one priority malt brand.”

To achieve this, Diageo has been investing in bringing some decommissioned distilleries back to lifealthough this investment takes time to bear fruit.

Another highlight in the results was Guinness, whose underlying sales grew 15% globally, with stout gaining share in its three largest markets – USA, Great Britain and Ireland.

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Highlighting Guinness’ growing popularity among women drinkers, Ms. Crew said the drink will continue to expand globally through its partnership with the Premier Leaguewhich was first reported by Sky’s Mark Kleinman.

The company still targets a 6% share of the global alcohol market – up from the current 4.7% – by 2030.

Crew insisted today: “We believe demographic trends, rising incomes in the developing world, spirits gaining share from beer and wine, and long-term premiumization will drive attractive underlying growth in our industry.

“We are confident that when the consumer environment improves, the actions we are taking will lead us back to growth.”

In the short term, however, the company faces a series of obstacles, mainly the normalization of purchasing behavior after a post-pandemic boom and consumer caution after the explosion of inflation unleashed across the world in 2022.

As Chris Beckett, head of equity research at wealth management firm Quilter Cheviot, said: “North America is experiencing consumer weakness, which is not an isolated issue, but rather an issue observed across multiple countries.

“Guidance remains vague and does not offer much optimism for a quick recovery.”

To be fair, Diageo is far from alone in suffering a drop in consumer confidence. This week alone there have been disappointing trading updates from the likes of Heineken and McDonald’s, while some of Diageo’s peers such as Remy Cointreau and Jack Daniel’s owner Brown-Forman have also confessed to difficult trading conditions.

A turnaround in sentiment, driven by falling interest rates around the world, cannot come quickly enough.