Profit warnings and guidance cuts have been a feature of this summer’s earnings season across Europe as some of the highest-profile companies grapple with weak consumer sentiment. That’s not particularly surprising. Even if the rate of increase is finally dropping off, the cumulative impact of 2½ years — give or take — of steadily rising prices has inevitably forced consumers to rein in their spending.
This latest trend is testing corporate strategies left and right, none more so than at Diageo. Like some of its rivals, the Guinness, Smirnoff and Johnnie Walker maker has put a lot of its eggs in the so-called “premiumisation” basket. Essentially, the theory is that with each passing generation drinking less than the previous, spirits makers can bridge the difference and then some with more expensive products aimed at consumers with more disposable income.
But with people pulling back in some of its key markets, the strategy is coming under intense pressure. On Tuesday, Diageo reported its first global sales drop since 2020 with net sales down 2 per cent in North and Latin America, where the group said consumers are looking for cheaper options amid flagging sentiment.
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“We are in a very extraordinary consumer environment,” said chief executive Debra Crew. “You do see persistent inflation that is really weighing on consumers and weighing on their wallets.”
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Yet, she reiterated the group’s commitment to premiumisation. “While we see some pockets of down trading, we also see pockets of premiumisation,” she added.
Meanwhile, Diageo’s share price has come under intense pressure over the past year, plunging by close to 29 per cent since last July. Some analysts have even speculated the owner of St James’s Gate could become a takeover target if the current trend continues although, as whiskey critic Jonah Flicker highlighted recently in the Robb Report, there are few if any companies that could afford the steep price tag on paper.
The jury is out on whether the premiumisation trend can withstand this sort of upheaval. And it’s not beyond the bounds of possibilities that some drinks groups, perhaps even Diageo, will do a U-turn on this strategy.
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