Diageo Warns of Continued Challenges as Consumers Remain Cautious — Update

By Andrea Figueras

Spirits maker Diageo confirmed its outlook for the near and medium term, but cautioned that a tough consumer backdrop means both the beverage industry and the company continue to face challenges.

The company behind brands like Johnnie Walker scotch and Smirnoff vodka said it continued to expect its organic operating margin to remain under pressure this year, with a challenging consumer environment weighing on sales growth. For the medium term, it still forecasts organic net sales growth of between 5% and 7%.

Like Diageo, other beverage companies saw their sales skyrocket during the pandemic as consumers began drinking at home. However, sales growth dried up as consumption trends normalized, leaving companies with high inventories and putting prices under pressure, particularly in the U.S.

While consumers continue to be cautious, Diageo is looking to invest and to boost productivity to win what it calls quality market share, Chief Executive Debra Crew said Thursday ahead of the company's annual general meeting.

Despite current woes, Diageo's CEO said growth would return once consumer environment improves.

Earlier this month, Corona beer maker Constellation Brands said it expected to book a loss of up to $2.5 billion related to its wines and spirits business, due to continued negative trends in the U.S. wine market. The group noted that macroeconomic challenges, particularly rising unemployment, was hurting demand and lowered its sales outlook.

French distiller Pernod Ricard said recently it expected a weak start to its current fiscal year, partly due to inventory reductions in the U.S.

Meanwhile, Davide Campari-Milano chief Matteo Fantacchiotti resigned from his role, just months after taking the reins of the company. His departure came days after the chief executive said that weakness experienced in the U.S. spirits industry during the first half persisted into the third quarter. He later clarified that soft trends were hurting the industry as a whole and wasn't an isolated issue faced only by Campari.

In early morning trade in London, Diageo's shares rose 4.3%. Shares across the beverage sector were trading higher amid recent stimulus measures in China, a key market for the industry.

The absence of further bad news in Diageo's trading update should be reassuring, Jefferies analysts Edward Mundy and Andrei Andon-Ionita said in a research note.

Write to Andrea Figueras at andrea.figueras@wsj.com

(END) Dow Jones Newswires

September 26, 2024 04:35 ET (08:35 GMT)

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