For most of the past 15 years, Diageo was possibly the most admired company at the top end of the FTSE 100 index. As well as being an export titan for the UK, the Johnnie Walker, Smirnoff and Guinness group performed beautifully for its shareholders year after year.
Sales growth invariably beat inflation, underpinned by an enviable balance between developed and emerging markets. Profit margins steadily improved under a “premiumisation” strategy of encouraging punters to “drink better, not more”. Acquisitions worked, allowing Diageo to go from nowhere to leader in tequila in no time. Sir Ivan Menezes, who died just before he was due to retire as chief executive last summer, was rightly hailed as a boardroom superstar.
And now? Well, it would be wrong to say Diageo’s woes are unique because the entire global spirits industry is having a weak run. But the company’s reputation for reliability and steadiness has disappeared faster than a shot of Don Julio.
Debra Crew, the successor of Menezes, got off to a shocking start last November with a profits warning related to over-stocking in Latin America – in other words, a serious misreading of how much was actually being consumed by drinkers. Now, in Tuesday’s full-year numbers, came the first fall in annual sales since 2020. The shares, which were £40 as recently as 2022, lost another 5% to £24.18.
The latest headache is the US, Diageo’s largest market by far, where Crew complained about “cautious” consumers. Since companies from Nike to McDonald’s are saying the same, the factor is clearly genuine. Cuts in interest rates may help if they come, but in the old days one thought of Diageo as a company as an outperformer in all weathers. That element seems to have gone missing. Even the Mexican tequila operation took a whack from “down-trading”.
In the circumstances, Crew’s insistence on sticking with a longstanding “medium-term” forecast for group-wide organic net sales growth of 5%-7% lacks credibility. Diageo has just turned in minus 0.6% and, even if one generously strips out Latin America, the figure was only 1.8%. In any case, what is “the medium term”? After the wild swings of the Covid period, which ended with a boom when pubs and bars reopened, Diageo may simply have become a less predictable operation.
On the plus side, Crew reported that inventories in Latin America have normalised (though she’s yet to explain adequately how Diageo’s on-the-ground intelligence was so duff in the first place). The company says it held or maintained market share in 75% of its measured markets, including in the US. And cashflow arrived as previously advertised.
For the time being, then, Crew should get the benefit of the doubt. There is little point in diluting the “premiumisation” strategy that worked well and may do so again; the spirts market has had downturns in the past. In the meantime, shareholders have the consolation of a Guinness operation (unfortunately only one-fifth of the whole) that keeps turning out excellent numbers.
But Crew could still do herself a favour. The stock market has already mentally ditched the idea that Diageo is a steady 5%-7% sales performer, with only minor year-on-year variations within the range. Its business now looks more exposed to sudden swings. If you must have targets, give shareholders ones they can believe in. Until then, the unmistakable new air of suspicion around Diageo is justified.
