10th Nov 2023 15:13
(Alliance News) - Diageo PLC issued its first profit warning since the onset of the pandemic, and it is the Guinness and Johnnie Walker owner's trading in the Latin America region which is hurting it.
But what is also a problem for Diageo is the fact that some punters are trading down. A premiumisation of drinking habits has abated and cheaper alternatives are getting more popular, AJ Bell analyst Russ Mould commented.
"The company's success over the past decade or so has been driven by sales of spirits. These generate a high margin and have created the means through which to invest not only in its business but also to make acquisitions to expand its brand estate. There has been a premiumisation trend among consumers in many parts of the world whereby people have been happy to spend more to get what they perceive to be a higher quality product. Diageo rode this tailwind with great success.
This shift in drinking habits is now being tested by a gloomier economic environment. Some people are trading down to cheaper products or are drinking less often, which means perceived 'luxury' companies like Diageo are finding life harder. The idea that luxury goods companies are immune to an economic downturn isn't stacking up. LVMH, Estee Lauder, Ralph Lauren and Watches of Switzerland have all talked about a slowdown in growth at various points this year, so perhaps Diageo falling into the same pit shouldn't have been a surprise."
Diageo, whose financial year runs to June 30, warned that growth in its first half will be weaker than the second half just gone.
Sales in Latin America and the Caribbean will act as a drag on growth, with the region hit by low consumption due to macroeconomic pressures. Sales in the LAC market are nearly 11% of its net sales value.
"Macroeconomic pressures in the region are resulting in lower consumption and consumer downtrading. These impacts are slowing down progress in reducing channel inventory to appropriate levels for the current environment," it explained.
Meanwhile, in other regions, it expects to continue to invest in additional advertising and promotion ahead of net sales. "We expect that there will be continued, albeit moderating, cost inflation, which will be partially offset by pricing actions," Diageo said.
Consequently, organic operating profit growth for the first half of its financial year is anticipated to decline from the prior year. In the first half of financial 2023, it had climbed 9.7%. In January, it had guided for organic operating profit growth between 6% and 9% between financial 2023 and financial 2025.
Diageo expects to see a "gradual" improvement in organic net sales and operating profit growth in the second half of financial 2024 compared to the first half.
Hargreaves Lansdown analyst Sophie Lund-Yates commented: "Diageo has long been a favoured steady-Eddie thanks to its seemingly impenetrable brand power and dividend paying ability, and there will now be concerns that the change in appetites could translate to other, larger markets."
Diageo shares slumped 15% to 2,766.00 pence each in London on Friday afternoon.
By Eric Cunha, Alliance News news editor
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