Diageo is turning to price cuts and new products in the US amid slowing demand for Tequila in a key market for the spirit.
The UK group yesterday (6 November) lowered its forecast for annual organic sales in part due to soft US demand overall, with Tequila sales seeing pressure.
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Diageo’s new guidance came alongside a trading update for its fiscal first quarter, a period that ran to 30 September.
The company said its Tequila business in the US had been “lapping tough comparatives” on sales of its Don Julio brand during the quarter. Overall, the US spirits market had faced “a weaker US consumer environment” than Diageo expected.
Speaking to analysts after the spirits giant published its new guidance, interim CFO Deirdre Mahlan said the sales growth Tequila had enjoyed in recent years had slowed. “There’s some category weakness that the Tequila category, which had transcended most of the poor spirits category for the last couple of years, can no longer define gravity,” she said.
Mahlan and interim CEO Nik Jhangiani said Tequila drinkers in the US were trading down and the company had seen competition intensify. “Competitive pressure has increased. You’re seeing that much more in terms of both frequency and depth of discounting,” Jhangiani said.
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By GlobalDataAs part of Diageo’s response, the company is adjusting prices for its Casamigos Tequila and launching an RTD under the brand. The business is also putting more efforts into Astral, a brand sold at a lower price point than Casamigos or Don Julio.
“The consumers are under some pressure, so we’re seeing a bit of a shift between the super-premium, where our products sit – Don Julio and Casamigos – to premium,” Mahlan said.
“The lapping part, of course, will start to moderate … but I think, as long as the consumer is feeling some pressure, we’re going to continue to see a bit of consumers moving to small sizes instead of buying the larger sizes and also perhaps buying at other price points.
“We are now leaning into Astral, so we do have offers for when the consumer makes those shifts but it is quite a dynamic category at the moment in terms of consumer behavior and that’s what you’re seeing show up in the numbers.”
She added: “We’ve mentioned in the past that we’ve been working to get our Casamigos pricing in the place that we think is appropriate. We have taken those actions. It does take some time for the retailers to reflect that on the shelf. In some places, we’re seeing that happen more rapidly than others and those adjustments are still coming through. Where those price adjustments on the shelf are coming through, we are seeing improved performance.
“We’ve got a great launch of Casamigos RTD, which we feel really excited about and I think is it’s a sign of the strength of the brand overall.”
Diageo is facing lawsuits in the US over the make-up of its Casamigos and Don Julio Tequila.
Last week, the company filed a motion to dismiss a lawsuit in Florida that alleges the brands are not made from “100% blue weber agave”.
Jhangiani told analysts: “I think the legal team is doing a great job and I won’t get into that in terms of the focus around dismissing those class action suits, which clearly are completely baseless but, if you do think about the element of what we need to continue managing in a dynamic environment, it is also how do we make sure our customers, the trade, our consumers, all feel really good about the quality of our products and the credentials of our products: the fact that it’s all made from 100% blue agave.
“I think the team in the US is doing a great job with a lot of action that you will start seeing around that to ensure that all of those three constituents from our trade, and our customers in particular, but our consumers feel really good about the credentials of our brand. More on that in days, weeks, months to come.”
Overall, Diageo expects its annual organic net sales growth “to be flat to slightly down” after a quarter that was also hit by “weakness in Chinese white spirits”.
The group had previously forecast its organic net sales growth would be “at a similar level” to its previous financial year, with growth sitting more in the second half of the year.
The Guinness owner had also expected its organic operating profit to grow by “mid-single digit”. It now expects this growth to sit between “low to mid-single digit”. The latest forecast “also includes the impact of tariffs as at this time”, Diageo said.
Diageo booked flat organic net sales in its first quarter. On a reported basis, net sales declined 2.2% to $4.9bn.
The company said volumes grew 2.9% on an organic basis, helped by better volumes in Asia Pacific and from its combined Latin America and Caribbean business.
