The Guinness to Johnnie Walker drinks maker Diageo has issued a profit warning as a result of cash-strapped customers in Latin America and the Caribbean consuming less alcohol and seeking cheaper brands.
Shares in the world’s largest spirits company plunged more than 11% in early trading on Friday, making it the biggest faller in the FTSE 100, as investors worried that the trend in the region might spread to other markets.
“Very tough economic conditions in Latin America mean consumers are cutting back and trading down to less premium options,” said Sophie Lund-Yates, the lead equity analyst at Hargreaves Lansdown.
“Diageo has long been a favoured steady [stock] 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.”
The company said that despite the downturn in the region, which accounts for 11% of global sales, its business “continues to win share in most markets, within the categories we participate in”.
The profit downgrade comes less than two months after the company told investors that its outlook was an expectation of an improvement in the rate of sales growth in the first half of its financial year, compared with the last six months of its previous trading year.
However, on Friday the company said it expected a slower rate of growth owing to a “materially weaker” performance in Latin America and the Caribbean.
“Macroeconomic pressures in the region are resulting in lower consumption and consumer downtrading,” the company said. “We now expect organic operating profit growth for the first half of fiscal 2024 to decline compared with the first half of fiscal 2023.”
Diageo, whose long-serving boss Sir Ivan Menezes died in June after a short illness, said it still had “momentum continuing in four of our five [global] regions”.
In the second half of its current financial year, the company expects a “gradual improvement” in sales and operating profit, compared with the first half, and intends to continue to invest in its brands to maintain and grow market share.
“While we expect operating environment challenges to persist, with ongoing cost pressure and geopolitical and macroeconomic uncertainty, we will move with speed and agility and continue to invest in marketing and innovation,” Diageo said.
However, Victoria Scholar, the head of investment at Interactive Investor, said the trend seen in Latin America and the Caribbean was a worrying sign in a sector that is traditionally resilient when consumers seek to cut household spending.
“Alcohol is typically viewed as a relatively economically resilient part of the market,” she said. “Trading down among consumers is a key risk to Diageo’s strategy, which has been to focus on quality over quantity.
“The economic downturn is likely to mean fewer consumers are willing or able to pay more for expensive high-margin premium spirits. In Europe and Asia Pacific, Diageo also expects slower momentum in the current half-year.”
