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Diageo’s profits fall 4.8%
Diageo’s results were not what chief executive Debra Crew would have wanted to mark her first full year in charge. Ron Emler reports.
The world’s biggest premium alcohol group’s profits fell by 4.8% but operating profit rose by 8% to $6 billion thanks largely to cost savings.
She called it a “challenging year for both our industry and Diageo with continued macroeconomic and geopolitical volatility.”
Reported net sales of US$20.3 billion fell by 1.4%, while the group’s organic net sales were US$129 million or 0.6% lower than in 2023. The 2.9-point price/mix gain was more than offset by volumes 3.5% lower.
Latin America
That was largely due to the disastrous 21.1% decline in Latin America and Caribbean sales which caused the shares to slump by almost 15% in a day last November.
The company was left vastly overstocked in the region by failing to spot that distributors were not reordering as expected in the wake of consumer reaction to inflation and continued price rises as interest rates remained elevated.
Crew said that the region had now been “significantly” destocked but remained affected by the volatile consumer environment, especially in Mexico where there was notable downtrading in both Scotch and Tequila.
Diageo’s organic operating profit fell by $304 million or 4.8%, with all but $2 million of that thanks to Latin America.
Reported operating profit grew 8.2% and reported operating profit margin grew 262bps, primarily due to the positive impact of exceptional operating items. However, organic operating margin contracted by 130bps.
Future growth
Crew sought to paint a positive picture of future growth when the consumer environment improved but the shares responded to the results by falling by almost 10% to below £24, their lowest since 2018.
Today the company is valued at about £53bn compared with almost £90 billion in 2021.
“We are confident that when the consumer environment improves, the actions we are taking will return us to growth,” she said.
“Diageo is a resilient business, benefitting from its global reach and unrivalled brand portfolio. With iconic brands that have been enjoyed for decades, Diageo takes a long-term view, and will continue to invest in our brands, people and diversified footprint to deliver sustainable long-term growth and generate shareholder value.”
She said Diageo was “gaining or holding share in measured markets totalling over 75% of our net sales value, including in the US.”
Tequila
In North America, which provides 39% of Diageo business, net sales fell by 3%, driven by a volume decline of 5%. Particularly hard hit was Casamigos Tequila, originally founded by actor George Clooney before being sold to Diageo, where sales were 22% lower.
Crew said the US remained “a volatile environment”, especially for Scotch and Tequila but in the past 12 months sales of Don Julia tequila were 12% up and Guinness 6% ahead.
In Europe, which is 24% of Diageo’s business, organic net sales grew by 3% despite spirits sales being 1% lower, due in part to winding down trade in Russia.
Crew said she had noticed “pockets of downtrading” in Europe especially for Scotch.
Guinness
In the UK net sales grew 5%, primarily driven by strong performance in Guinness, which gained share in both the on-trade and off-trade.
Crew reported that Diageo cannot make enough Guinness 0.0 to meet demand. “It is literally flying off the shelves,” she said.
Like all other spirits group’s Diageo has big hopes for the Asia Pacific region where demographics and economic growth are working in their favour.
Overall the area generated net sales growth of 4% and contributed 19% of Diageo’s business.
China
Chinese white spirits generated much of the 12% annual sales growth but significantly Scotch fell by 1%.
Sales in India grew 8%, driven by double-digit growth in local whisky and scotch, supported by price/mix from continued premiumisation and price increases.
While Diageo’s shares were by far the biggest fallers on the London stock market in early trading, analysts took a longer-term view.
They suggested that Crew and departing finance director Lavanya Chandrashekar might have “kitchen sinked” the numbers, throwing in all possible bad news at aa time when poor results were expected so as to show an improved picture next year.
On the other hand, Crew refused to be drawn on when Diageo might return to its long-term growth targets, other than when “the consumer environment improves”.
Analysts tend to back that view because of Diageo’s portfolio firepower and the fact that it has acted rapidly to beef up its data collection and interpretation in the wake of the Latin America debacle.
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