Diageo, the company behind popular drinks like Guinness and Johnnie Walker, has recently announced a decrease in profits due to a decrease in alcohol consumption and a preference for more affordable brands among customers in Latin America and the Caribbean.
The stock of the biggest global spirits company experienced a sharp decline of over 11% during Friday’s early trading, causing it to be the top decliner in the FTSE 100. Investors expressed concerns that this downward trend in the region could potentially impact other markets as well.
“According to Sophie Lund-Yates, the main equity analyst at Hargreaves Lansdown, the challenging economic situation in Latin America has led to consumers reducing their spending and opting for lower-priced alternatives.”
Diageo has been a popular and reliable stock due to its strong brand influence and consistent dividends. There may be worries that the shift in consumer preferences could impact larger markets as well.
Despite the decline in the region, which makes up 11% of global sales, the company stated that its business is still gaining market share in most markets for the categories it operates in.
The company’s decrease in profits occurred within two months of informing investors that they anticipated an increase in sales growth during the first half of their fiscal year, compared to the last six months of the previous year.
On Friday, the company announced that it anticipates a decrease in growth due to a significantly weaker performance in Latin America and the Caribbean.
The company stated that economic challenges in the area are leading to a decrease in consumer spending and a shift towards lower-priced goods. As a result, we anticipate a decrease in organic operating profit growth for the first half of fiscal 2024 compared to the same period in 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”.
During the latter half of the current fiscal year, the company foresees a gradual increase in sales and operating profit. This is in contrast to the first half, and the company plans to keep investing in its brands to sustain and expand its share in the market.
Diageo stated that although they anticipate difficulties in the operating environment to continue due to cost pressures and uncertainties in geopolitics and macroeconomics, they will remain quick and adaptable in their approach and will continue to make investments in marketing and innovation.
Unfortunately, Victoria Scholar, the leader of investment at Interactive Investor, expressed concern about the recent trend in Latin America and the Caribbean. This is troubling for a sector that is typically resistant when consumers attempt to reduce household expenses.
She stated that alcohol is often seen as a financially durable aspect of the industry. The potential decrease in spending by consumers is a significant concern for Diageo, as their strategy has been to prioritize quality over quantity.
Due to the economic decline, there may be a decrease in the number of individuals who are willing or able to pay a higher price for luxury alcoholic beverages. Diageo anticipates a slower growth rate in both Europe and Asia Pacific during the current six-month period.