The drinks maker has come under pressure from investors amid falling sales, management changes, and a broader trend toward reduced alcohol consumption.The drinks maker has come under pressure from investors amid falling sales, management changes, and a broader trend toward reduced alcohol consumption.
Spirits maker Diageo
CEO Debra Crew said the prospect of tariffs could hamper the firm’s efforts to recover falling sales and that it had added “further complexity” to its ability to provide updated guidance.
Diageo had previously forecast medium-term organic sales growth of between 5% and 7%.
Shares of Diageo fell on Tuesday to their lowest level since March 2020, before paring losses. The stock was last seen down 0.4% by 9.49 a.m. London time, while fellow drinks makers David CampariPernod Ricard
“We are taking a number of actions to mitigate the impact and disruption to our business that tariffs may cause, and we will also continue to engage with the U.S. administration on the broader impact that this will have on everyone supporting the U.S. hospitality industry, including consumers, employees, distributors, restaurants, bars and other retail outlets,” Crew said in a statement accompanying the firm’s interim earnings.
President Donald Trump on Monday agreed to pause previously announced 25% tariffs on Canada and Mexico after eleventh-hour negotiations with the two countries. The temporary agreement will delay tariffs for at least 30 days.
In a Tuesday earnings call, Diageo’s Chief Financial Officer Nik Jhangiani said that U.S. tariffs could result in a $200 million hit to the firm’s second-half operating profit — primarily from disrupted tequila sales — if the U.S. tariffs come into effect from March.
Jhangiani added, however, that such U.S. levies were “expected” and that the firm was taking a number of actions to mitigate the impact, such as pricing strategies, inventory management, supply chain adaptation and reallocation of investment. Further updates will be provided when management can “more accurately forecast the financial impact of tariffs,” he said.
The FTSE 100-listed company posted a 0.6% decline in first-half reported sales to $10.9 billion, coming in slightly ahead of the $10.7 billion estimated by analysts in an LSEG poll.
Spirits brands including Tanqueray, Gordon’s and Smirnoff saw the steepest declines in net sales, while Guinness was a clear outlier, posting double-digit growth for an eighth consecutive half-year period. That was despite supply chain disruptions which led to shortages of the popular Irish stout over the festive Christmas period.
The drinks maker has come under pressure from investors amid falling sales, management changes, the rise of weight-loss drugs — which may be able to reduce alcohol consumption — and a broader trend toward low- and no-alcohol products.
Shares of Diageo — whose brands include Johnnie Walker, Captain Morgan and Don Julio — fell 3% Monday amid a wider global sell-off, as investors assessed the economic impact of Trump’s tariffs on imports from Canada, Mexico and China.
Almost half (46.2%) of Diageo’s U.S. sales are derived from imports from Mexico and Canada, including brands such as Crown Royal, Don Julio and Casamigos, Jefferies analysts estimated in a note Sunday.
That compares to the just over one-third (35.3%) of U.S. sales imported from Mexico and Canada for Italy’s Campari Group and the 6% equivalent for France’s Pernod Ricard.
As such, Diageo could be expected to hike prices for U.S. consumers by around 4.6% — and that’s before any possible new tariffs on EU goods, the analysts said.
“Alcohol particularly, really relies on exports. Tequila has to be made in Mexico, so there’s no room for maneuver, there’s no way you could shift that to an American factory,” Jonny Forsyth, senior director of food & drink at Mintel, told CNBC’s “Squawk Box Europe” on Tuesday.
“You’ve got the same for Scotch in Scotland. And Diageo, in particular, is hugely exposed because it relies a lot on now on tequila and Scotch sales,” he added.
In 2024, Diageo reported its first drop in global sales since the start of 2020. Sales fell 1.4% to $20.3 billion in the year ended June. It followed a prior profit warning in November 2023 which showed declining sales in Latin America, the Caribbean and the U.S.
Diageo shares are currently languishing near pandemic-era lows, despite briefly climbing last month on reports that it was it was considering the sale of its Guinness beer brand — a top performer in the group’s portfolio — or its stake in LVMH
In a statement released Jan. 26, the firm said it had “no intention to sell either,” sending the stock lower again.
Chris Beckett, head of research at Quilter Cheviot, said the removal of Diageo’s guidance was likely to add further pressure to the stock over the near-term, but added that Tuesday’s results pointed to green shoots of recovery in consumer demand, particularly in previous weak American markets.
“This target was set during the pandemic when demand was exceptionally high, making it unrealistic in the current environment,” Beckett said in a statement.
“Overall, we view these results as solid,” he continued. “The spirits market has faced challenges over the past few years, but Diageo is well-positioned. We do not believe there has been a fundamental decline in demand for high-quality spirits brands; rather, there has been a temporary soft patch that will recover.
Discover more from World Byte News
Subscribe to get the latest posts sent to your email.
