Falling sales in Latin America are draining spirits at Diageo with a concoction of persistent economic pressures and supply chain problems set to linger like a hangover in the coming months.
This morning's news came as no surprise after Diageo warned in November of a build-up in unsold stock in Latin America following a slowdown in demand for expensive spirits. However, predictions of a further sales decline of up to 20% on top of the 23% crash in the first half of the financial year will undoubtedly leave a bitter taste in the mouths of investors.
READ MORE: Diageo reports sliding sales in key whisky export market
That said, the company was up against some hard year-on-year comparisons in the second half of 2023. It is also worth noting that trading across other regions remained positive, driven largely by price hikes: sales were up 3% in Europe, 6% in Asia-Pacific, and more than 9% in Africa.
But Latin America and the Caribbean are among Diageo’s higher-margin territories, meaning that any decline in those sales has an exaggerated impact on organic profits which tumbled by 5.4%. The outlook on this front remains murky for the second half, with markets now forecasting a small decline in operating profit.
The group still has "a few months" of excess stock to clear but hopes to draw a line under its Latin American woes by the time its financial year comes to a close in June. The territory will be key to the improvement of overall profit margins going forward, but to a large extent the thirst for premium drinks among cash-strapped consumers is outside of Diageo's control.
It’s been a difficult 12 months for Diageo, but there are reasons to be positive over the medium term as the business continues to invest and the trading environment improves.
Looking further ahead, the group appears well-positioned to benefit from trends in the drinks and spirits industry, with ample room for growth in what remains a highly fragmented market. And while customers are downtrading in some regions, Diageo's strong cash generation and free cash flow underlines the benefits of its global reach and the wide diversity in its brand portfolio.
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