The spirits industry as a whole is seeing pressure on sales in Latin America, Diageo CEO Debra Crew said today (10 November) after the company issued a profit warning sparked by its business in the region.
Earlier today, Diageo said it expects its group underlying operating profits to fall in the first half of its financial year amid pressure on its business in Latin America.
The Johnnie Walker owner sees its organic operating profit declining in the first half of its 2024 financial year.
Diageo pointed to “a materially weaker performance outlook” for its operations in Latin America and the Caribbean, a division that accounted for 11% of its annual net sales in its last fiscal year.
The beer and spirits giant said its new guidance was “primarily due” to lower net sales in the region, plus “increased trade investment, lower operating leverage and adverse mix resulting from downtrading”.
Speaking to reporters after the profit warning, Crew said Diageo had been gaining share in certain parts of the Latin America spirits market and said the whole industry was seeing drinkers opting for cheaper products.
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“I will say that this is an industry thing within spirits,” Crew said. “We are actually gaining share in the markets that we can track in Latin America, with the exception of Mexico, so, actually, we are performing well compared to the industry in most markets. The industry is under pressure and that is specific to spirits. We are seeing the downtrading within spirits.”
In the wake of the profit warning, Diageo’s shares tumbled in early trading. The share prices of other distillers listed in Europe were also down.
In the first half of Diageo’s previous financial year, the net sales from its Latin America and Caribbean division were up 20% on an organic basis. “We are lapping extremely high comps,” Crew said.
The Diageo chief executive said the company had told investors in August, when it published its annual results, that the company had ended that fiscal year with “higher inventory levels in Brazil”.
However, inflation and higher interest rates in the region had led to pressure on consumer spending and it was taking longer for customers to work through the existing stocks, she explained.
“Unfortunately, macroeconomic pressures have worsened. That caused lower consumption and really more consumer downtrading than the team was expecting and that has really slowed down the region’s ability to work through that channel inventory within the first quarter as we expected,” Crew said.
“Additionally, while we have good visibility and inventory through our distributors, we have less visibility to inventory at wholesalers and retailers that they sell to and this is particular to several markets in Latin America.”
She added: “We have a very experienced team in Latin America and, while in a more stable environment, we would be able to see this, in the more volatility that we saw through the Covid super-cycle, it’s been hard to see through what part of this was true consumption growth versus inventory increases and these we’ll call it more opaque layers. We’re putting together the right action steps to manage this.”
Asked by Just Drinks for more detail on the steps Diageo plans to take to try to boost sales in Latin America, Crew said: “We are taking actions right now to manage this inventory as quickly and as efficiently as possible and we’ll come back as the interim results in January to give more details on those those actions. Remember that this is around 10% of our business. Ninety per cent of our business is on the right trajectory.”
Diageo said earlier it has “momentum continuing” in its four other operating regions.
In North America, the company expects a “gradual improvement” in its organic net sales growth in the first half of fiscal 2024.
Diageo also sees its rate of net sales growth rising in Africa versus in the second half of fiscal 2023.
For Europe and Asia Pacific, the group noted “continued momentum, albeit slower than in the second half of fiscal 23”.
Shares in Diageo were down 15.07% at 2,756p at 12:23 GMT. The share price of rival distiller Pernod Ricard was down 5.1% at €165.45 at 13:09 CET.
Shares in Campari were 3.74% lower at €10.55 at 13:24 CET, while shares in LVMH LVMH Moët Hennessy Louis Vuitton were down 3.88% at €686.70 at 13:10 CET.