Diageo warns of ‘extraordinary consumer environment’ after sales decline

Diageo’s head has warned consumers that they are in an “extraordinary” environment, as the company reported its first drop in global sales since 2020.

The company that makes Smirnoff, Casamigos, and Johnnie Walker whiskey expects consumer pressure to continue in the months ahead, echoing the warning issued by fast-food chain McDonald’s Monday.

Debra Crew, chief executive officer of Debra Crew Group, said: “We live in an extraordinary consumer environment.” “You can see that persistent inflation is weighing down on consumers’ wallets and on their pockets.”

Diageo’s grim forecast is likely to fuel fears about the strains placed on consumers in major economies.

In the early hours of trading on Tuesday, shares in Diageo fell by more than nine per cent.

Investors are closely monitoring signals that consumers may be flagging.

Simon Hales, Citi analyst, stated that the outlook “is likely to lead to downgrades” of Diageo. He noted that “near-term trading is still very low” and therefore, the stock was expected to trade lower.

Diageo announced that its sales for the year ending June were down 1.4 percent to $20,3bn. The volume of drinks sold in this period was also down 5 percent as consumers reduced their consumption.

Diageo stated that the “challenging environment for consumers” will continue in the current financial period, which lasts until June 2025.

Crew will face more challenges as a result of the cautious outlook.

The company issued a warning in November about profit as sales in Latin America, the Caribbean and Africa plunged.

Since then, several senior executives, including Lavanya C. Chandrashekar the chief financial officer of Coca-Cola Europacific Partners’ largest bottler, have left. Nik Jhangiani will replace her in September.

Diageo stated that it is now focusing on restoring its organic net sales to between 5 and 7%, which is the medium-term target.

Analysts think that the guidance given is unrealistic, considering the current consumer climate and the nature of the spirits market.

Laurence Whyatt said, “It is clear that the growth of spirits is volatile. Sometimes it is well ahead of this range as in the early years of pandemics and sometimes below the range.” “Therefore, such a narrow range seems naive and misleading at best.”

Crew stated that the company expects to be back on track with its medium-term goals once the consumer environment improves.

Spirits sales in North America, its biggest market, fell 3 percent on an organic basis. Volumes dropped by 5 percent as the US consumer began to show signs of stress. Sales of tequila, which have been driving growth for the company for the past few years, dropped by 5 percent.

The sales of Casamigos – co-founded with George Clooney – fell by 22 percent. Don Julio sales, on the other hand, increased by 12 percent.

Crew told reporters that while there are pockets of lower trading, “we also see pockets where premiumisation is taking place.” Diageo has been basing its strategy on premiumisation for a long time. The idea is that consumers want less alcohol but higher priced products. This strategy is being put to the test in this cost-of-living crisis.

Mexico, the second largest market for the group, saw net sales decline by 15%, mainly due to consumers switching to cheaper tequilas.

Crew explained that “we are not increasing our share of the market in Mexico, and are looking into how we can deploy this portfolio there so that we get back to shared growth.”