Diageo’s profits in Latin America hit by “perfect storm”

Diageo’s chief executive has announced plans to reduce stock levels drastically in the region of Latin America, which is struggling. A “perfect storm” caused sales and profit targets to be missed.

Debra Crew who was appointed in June of last year said that the “materially lower performance” in this region had been caused by “fast changing consumer sentiments and high inventory levels”, which significantly affected the business’s performances.

After reviewing stock levels and monitoring performance during the crucial holiday season, Diageo took action to reduce these stocks to more appropriate levels by the end 2024. She said that this was a priority. “We’re not happy with these results, and I personally am restless in my desire to make this business perform.”

Crew, 53 years old, noted that organic net sales had declined by 1.5 percent in North America. She said: “We are not satisfied with our market share in the United States.” But she also added that North America has improved since the second quarter of last year.

Crew responded: “It was a perfect storm.” When asked if the future of Alvaro Carenas, the president of the Latin American Division, could be in question due to the profit warning, Crew replied: It’s not just one person. It was not a case of deception or wrongdoing. You can imagine that there were some difficult and direct conversations. “Alvaro and our team in LAC [Latin America & Caribbean] are committed to fixing the issue, and we’re working on it.”

Diageo’s net sales for the six months to the end December were down 1.4% to $11 billion, primarily due to a currency loss of $167 million. Organic net sales fell by 0.6%, falling short of market expectations of flat sales. Crew reported that after excluding the decline of 23 percent in Latin America and Caribbean, net sales rose by 2.5 percent.

She explained that the fall in Latin America and Caribbean, which caused the severe profit warning in November, was caused by strong trading in comparison to last year as well as by lower consumption and trading by consumers as a result of the tough economic climate.

Diageo’s Operating Profit fell by 11,1% to $3.3 Billion, due to lower margins and exceptional items. Operating profit decreased by 5.4% on an organic basis. Cashflow increased from $1 billion up to $1.5 billion.

Diageo expects organic net sales to grow gradually in the second quarter, while Latin America and Caribbean will take a 10 to 20% hit. The operating profit will decline in the second quarter. Diageo anticipates that the consumer climate will gradually improve for the 2025 fiscal year.

Guinness’s net sales grew by 14 percent, aided by a 24% rise in female drinkers, in Britain. This helped drive net sales growth at Diageo UK of 9 percent.

The Latin American region was once again blamed for a 10 percent drop in Scotch Whisky net sales. Latin American net sales dropped by 5 percent. Johnnie Walker’s sales fell by 5%, but Buchanan Scotch Whisky suffered the worst slump, with a 29% drop on the back of volume falling by 21 %.

Last August, the company, which has brands such as Guinness, Tanqueray Gin and Baileys Liquor, announced an $1 billion share-buyback program. Since then, it has returned half that amount. The company also announced an interim dividend of 40.5 cents, a 5 percent increase.

Diageo shares rose 18 1/2p or 0.7 percent to £28.60.

George Clooney, Rande Gerber, and Mike Meldman hit the jackpot in 2017 when they sold their Casamigos Tequila to Diageo. They received $700 million upfront, and another $300 million over the next decade if they met financial targets.

The extra $300 million was a no-brainer. The last $113 million earned from the Casamigos purchase was paid in September 2021. This is only four years after the original ten-year plan.

The two parties continue to work together under an agreement on marketing services to promote super-premium Tequila.

Debra Crew could have been forgiven if she thought that the new chief executive of Diageo was given a pass to the hospital when she looked at the Casamigos numbers yesterday. The drinks group’s Latin American division had issued a dire profit warning for November. But tequila, its main product, was also a factor.
The fastest-growing category was losing its appeal.

Casamigos is a super-premium brand of tequila founded by George Clooney and Rande Gerber.

The net sales of American tequila in the first half-year fell by 5 percent, due primarily to a Casamigos slump of 14 percent. Net sales of tequila for the entire group fell by 6 percent, due to declines in North America, Latin America and Europe. This was partially offset by strong gains in Asia Pacific, Africa and Europe, which reflected the global expansion by Don Julio. Diageo, however, continued to increase its market share.

Crew stated that “the Casamigos company is doing much better than the 14 percent drop in sales would suggest.” The global expansion of Tequila was “very young” and sales were slowing down because of “our rapid growth”. In the summer “you saw Paloma cocktails everywhere”.

Sean “Diddy Combs” also had tequila issues. Diageo recently settled a legal dispute by agreeing to buy the rapper’s 50% stake DeLeon tequila that they jointly owned. This cost is believed to be a large part of the $108m of “various disputes and litigation matters” that were included in its half-year financial results.