UK – Diageo, a British multinational beverage company, has issued a profit warning due to depressed sales in Latin America as cash-strapped customers in the region consume less alcohol and seek cheaper brands.  

Latin America and the Caribbean is one of the Johny Walk producer’s largest markets accounting for 11% of its annual net sales in its last fiscal year. 

The beer and spirits giant noted that macroeconomic pressures in the region are resulting in lower consumption and consumer downtrading. 

These impacts, it noted, are slowing down progress in reducing channel inventory to appropriate levels for the current environment.  

“We now expect organic operating profit growth for the first half of fiscal 24 to decline compared to the first half of fiscal 23, primarily due to LAC’s declining net sales, increased trade investment, lower operating leverage, and adverse mix resulting from downtrading,” said Diageo. 

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”. 

 The company thus 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. 

The Tanqueray producer said, “We expect operating profit to grow broadly in line with organic net sales growth, while we continue to invest behind our brands. Over time, as inflation moderates and productivity from our supply agility program flows through, we expect operating profit to grow ahead of organic net sales growth.” 

A £15 billion warning 

In the wake of the profit warning, Diageo’s shares tumbled in early trading as investors worried that the trend in the region might spread to other markets. 

Shares in the world’s largest spirits company plunged more than 11% in early trading on Friday, the biggest single-day fall for the Gordon’s and Smirnoff owner for more than 30 years. 

The announcement also prompted shares in French rival Pernod Ricard to fall 5.1% and Italian business Davide Campari to sink 4%. 

According to Standard UK newspaper, more than £15 billion was wiped from the market value of Europe’s biggest drinks makers today after Diageo profit warning. 

A worrying trend 

 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 traditionally resilient sector 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 of focusing 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.