Few FTSE 100 companies, over the last decade or so, have been as reliable as Diageo.
The world’s biggest spirits company, home to brands such as Johnnie Walker Scotch whisky, Gordon’s gin and Smirnoff vodka, seemed able to grow sales and profits regardless of the economic weather.
Yet that reputation has taken a knock during the last 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 the 2019-20 financial year 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 $20.3bn in the year to the end of June were down 1.4% on the same period a year earlier. Strip out the impact of foreign currency movements and underlying sales were down 0.6%.
That meant underlying operating profits fell by 5% to $5.9bn – although, at a headline level, they were up by 8% due to a one-off gain following the decision to reverse an impairment on its Chinese white spirits brand Shui Jing Fang.
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The shares fell by more than 10% on the news at one point – wiping £6.5bn from Diageo’s stock market value.
The decline was mainly due to what the company called a “materially weaker” performance in the Latin America and Caribbean region, which makes up 8% of group sales, although sales were also down in North America, Diageo’s most important market, which it blamed on a cautious consumer environment.
The big challenge for Debra Crew, Diageo’s chief executive, is to convince investors that these are just short-term bumps in the road for a company that, on its own, accounts for £1 in every £10 of the UK’s total food and drink exports.
Ms Crew, who succeeded the late Sir 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 it again.”
Ms Crew, a former intelligence officer in the US military before embarking on a career at consumer goods companies including Mars, Nestle and Pepsico, pointed out that Diageo had enjoyed a “material improvement in market share” during the last six months and, during the year as a whole, had held or grown market share in markets making up more than three-quarters of its sales.
She said all of the company’s biggest brands – those whose sales are more than $1bn annually – had held or grown market share.
So what of the specific problem areas?
In Latin America and the Caribbean, Diageo was caught out late last year by its wholesalers in countries like Brazil and Mexico having too much inventory just as consumers – who had bought aggressively following the end of COVID lockdowns – began trading down to cheaper tequila and scotch brands.
Ms Crew insisted today that Diageo was now back to gaining market share in Brazil, its biggest market in the region, while in Mexico, its second biggest market, stocks were now at more appropriate levels.
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The bigger concern, though, is North America where, again, consumers have reverted to more normal behaviour after splurging on premium spirits for a couple of years after the end of lockdowns. As inflation has eaten into disposable incomes, North American consumers have also been trading down to cheaper brands.
Shockingly, Casamigos, the premium tequila brand for which Diageo paid George Clooney and his business partners $1bn in 2017, saw its sales drop by 22% during the year after having grown at an average annual rate of 70% between 2019 and 2023.
Ms Crew argued, though, 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 out its 10 biggest markets in Scotch whisky – its biggest individual category. Ms Crew pointed out that Johnnie Walker remains the world’s biggest spirits brand.
She added: “Our focus… is to continue to build on Johnnie Walker’s success and share gains while building on our opportunity in single malts, where we are under-developed, led by The Singleton as our number one priority malt brand.”
To that end, Diageo has been investing in bringing some mothballed distilleries back to life, although that investment will take time to bear fruit.
Another highlight in the results was Guinness, whose underlying sales globally rose by 15%, with the stout gaining share in its three biggest markets – the US, Great Britain and Ireland.
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Pointing out the growing popularity of Guinness among female drinkers, Ms Crew said the drink would continue to expand globally through its partnership with the Premier League, which was first reported by Sky’s Mark Kleinman.
The company is still targeting a 6% share of the global alcohol market – up from the current 4.7% – by 2030.
Ms Crew insisted today: “We believe demographic trends, rising incomes in the developing world, spirits gaining share from beer and wine, and long-term premiumisation will drive attractive underlying growth in our industry.
“We are confident that, when the consumer environment improves, the actions we are taking will return us to growth.”
In the short term, though, the company faces a number of headwinds, chiefly the normalisation of buying behaviour after a post-pandemic blow-out and consumer caution following the burst of inflation unleashed around the world in 2022.
As Chris Beckett, head of equity research at the wealth management firm Quilter Cheviot, put it: “North America is experiencing consumer weakness, which is not an isolated issue but rather one observed across several countries.
“Guidance remains vague and doesn’t provide much optimism for a swift turnaround.”
In fairness, Diageo is far from alone in suffering from a downturn in consumer confidence. This week alone has seen disappointing trading updates from the likes of Heineken and McDonald’s while some of Diageo’s peers, such as Remy Cointreau and the Jack Daniel’s owner Brown-Forman, have also confessed to tough trading conditions.
A turnaround in sentiment, driven by interest rates falling around the world, cannot come quickly enough.
