Diageo issues profit warning due to decline in drinking in Latin America.

The company Diageo, known for producing drinks such as Guinness and Johnnie Walker, has released a statement warning of lower profits due to a decrease in alcohol consumption and a shift towards more affordable brands in Latin America and the Caribbean.

The stock of the biggest spirits company in the world dropped by over 11% at the start of trading on Friday, causing it to be the top decliner in the FTSE 100. This raised concerns among investors that the decline in this region could potentially affect other markets as well.

Sophie Lund-Yates, the main equity analyst at Hargreaves Lansdown, stated that the challenging economic circumstances in Latin America are causing consumers to reduce their spending and opt for lower-priced alternatives.

“Diageo has been a popular and stable stock choice due to its strong brand presence and consistent dividends. However, there may be worries that the shift in consumer preferences could impact other, larger markets.”

The company reported that even with the decline in the region, which makes up 11% of worldwide sales, their business is still gaining market share in most markets and categories they are involved in.

The company’s reduction in profits occurred within a short span of two months, contradicting their earlier statement to investors that there would be a boost in sales growth during the first half of the fiscal year. This was in comparison to the last six months of the previous trading year.

Unfortunately, the company announced on Friday that it anticipates a decrease in its rate of growth due to a significantly weaker performance in Latin America and the Caribbean.

The company stated that economic challenges in the area have led to decreased spending and a shift towards cheaper products. As a result, there is a projected decrease in organic operating profit growth for the first half of fiscal year 2024 compared to the first half of fiscal year 2023.

Diageo, the company whose CEO Sir Ivan Menezes passed away in June due to a brief illness, stated that they are still experiencing growth in four out of their five global regions.

During the latter half of the current fiscal year, the company anticipates a gradual increase in both sales and operating profit compared to the first half. Additionally, the company plans to persist in investing in its brands in order to sustain and expand its market presence.

Diageo stated that they anticipate difficulties in the operating environment to continue, due to cost pressure and uncertainties in geopolitics and macroeconomics. However, they are committed to reacting quickly and flexibly, and will continue to prioritize investments in marketing and innovation.

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Unfortunately, according to Victoria Scholar, the leader of investment at Interactive Investor, the current trend in Latin America and the Caribbean is concerning for a sector that is typically strong during times of consumer budget cuts.

The speaker stated that alcohol is often seen as a financially stable aspect of the market. She also mentioned that consumers choosing cheaper options could pose a significant threat to Diageo’s approach of prioritizing quality over quantity.

Due to the economic recession, it is expected that there will be a decrease in the number of consumers who are willing or able to pay a higher price for luxury alcoholic beverages with a high profit margin. Diageo predicts a slower growth rate in Europe and Asia Pacific for the current six-month period.

Source: theguardian.com