Guinness is a bright spot in Diageo’s otherwise tough year

It’s been a tricky first 12 months at the helm of Diageo for CEO Debra Crew.

Taking on the hot seat in the most unfortunate of circumstances after the tragic death of Sir Ivan Menezes, Crew has had to contend with an unwelcome profit warning triggered by inventory mismanagement in Latin America, as well as cautious US consumers rowing back on Covid consumption excesses.

It’s led to the Johnnie Walker brand owner this week reporting its first post-Covid net sales decline. Revenues of $20.3bn (£15.8bn) were down 0.6% on an organic basis, slightly worse than analyst expectations of a 0.2% slide. Organic operating profit, meanwhile, declined by 4.8%. 

Whichever way Diageo tries to dress it up, the results are disappointing. Shares in the company fell nearly 8% before lunchtime, before rallying slightly (-5%) as the LSE prepared to close on Tuesday (30 July). Russ Mould, investment director at AJ Bell, said the slide was “the market’s way of saying it is thoroughly unimpressed with the business”. 

“Crew will be fighting to keep her job as chief executive,” he predicted. “If the board doesn’t do something, one can expect activist investors to circle Diageo and push for new leadership.”

Downtrading in scotch and tequila

The main source of Diageo’s woes was the company’s Latin America and Caribbean (LAC) reporting region. Sales tumbled 21.1% due to “fast-changing consumer sentiment” and persistent consumer downtrading, Diageo said.

It said it had taken corrective action to remedy the inventory problems which led it to issue that most fated of profit warnings in November, but admitted the trading environment remained “challenging” amid soft demand for “international premium spirits” in markets like Mexico.

“Downtrading in scotch and tequila has continued to impact us [in Mexico], and we’re not gaining share in that market,” Crew said.

‘Cautious’ US consumer

Other areas of Diageo’s global business will also give Crew cause for concern. Notably North America – the foundation of Diageo’s remarkable post-Covid growth tear – which slid by 2.5% on an organic basis.

Consumers remained cautious in light of high interest rates and the forthcoming US election in November, but were willing to splash out on posh spirits for the right occasion, Crew said.

“They [US consumers] are quite cautious with what they are spending on, but when they are at an important event, or when they want to buy the right gift and it is really important to them, we do see premiumisation.”

She said Diageo remained confident of returning to topline growth, but was vague on the specifics of when. The company’s medium term guidance of +5%-7% organic growth remains unchanged.

Guinness boost to Diageo GB sales

Happily, one area of the business that isn’t giving Crew a headache is at home. Sales in Great Britain grew by 5% in the year to 30 June, as innovations like Nitrosurge and the growth of 0.0% – now the UK’s biggest alcohol-free beer brand in the off-trade [NIQ 52 we 29 July] – helped Guinness sales grow by 30%.

Globally, Guinness has now seen seven consecutive quarters of double-digit growth – a remarkable feat for a heritage brand that has found a new lease of life in popular, and meme, culture. The recently announced partnership for Guinness to become the official beer of the Premier League is likely to expand the brand’s appeal further.

“What’s great about it is we’re really broadening the consumer base,” said Crew. “The rugby lads still love us, but we also have women coming into the brand.”

With everyone from Olivia Rodrigo to Keir Starmer professing their love for a pint of the black stuff, Guinness’ universal appeal shows strong brands and clever marketing can prevail, even in the face of economic headwinds. 

Diageo will need more similar success stories if it is to win back investors’ confidence.