By Scott Wright
DIAGEO saw its shares close down nearly six per cent last night after the drinks giant reported sales growth had slowed in North America, its biggest market, with Scotch whisky declining across the Atlantic in the first half of its current financial year.
The Johnnie Walker maker reported overall top-line sales growth of 9.4% to £9.42 billion in the six months ended December 31, lifting operating profit to £3.2bn from £2.7bn. The Guinness owner, which said growth was seen across most categories and led by Scotch, Tequila and beer, declared it is now 36% bigger in terms of the value of its sales than it was before the pandemic.
But sales grew more slowly in the first half compared with the same period in 2021, when the market was boosted by the reopening of the on-trade after Covid restrictions, with the firm also highlighting pressure on margins from cost increases.
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In North America, Diageo said organic sales had grown by 3% to £2.96bn, compared with the double-digit percentage growth it saw in the first half of 2021. Strong growth in Tequila and American whiskey offset declines in Scotch, Canadian whiskey, and vodka.
Net sales of Scotch in the US dipped by 5% with Johnnie Walker down by 10%, though Diageo said the brand had gained market share in spite of price increases and supply constraints on certain pack sizes.
Ewan Andrew, Diageo’s president of global supply chain and procurement and chief sustainability officer, told The Herald that the company’s Scotch whisky business had shown strong growth on a worldwide basis in the first half when asked to comment on its performance in the US. He said Scotch whisky sales had increased by 19% globally, led by Johnnie Walker which was up 21%. Malt whisky showed growth of 28%.
Mr Andrew said that sales in the first half were up against a tough comparison the year before, which saw the company experience “extraordinarily high growth” as it benefited from the recovery of the on-trade, the continued resilience of demand in the off-trade, and from customers replenishing stocks.
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He said: “Ultimately, we finished in a really good place with the distributor stock levels. We feel very confident in [our] continued growth in the single digits for the North American market of premium drinks while continuing to invest.”
Mr Andrew said Diageo remained committed to investing “hundreds of millions” of pounds each year into the Scotch whisky industry, both in its own assets and in the supply chain through its purchase of commodities such as cereals. A recent investment of £185m saw Diageo develop the Johnnie Walker Experience in Edinburgh and upgrade the distilleries known as the four “corners” of the blended Scotch: Caol Ila, Glenkinchie, Cardhu and Clynelish. The renowned Port Ellen distillery on Islay will be brought back into production this year.
Asked if sales of more expensive whiskies have been affected by the cost-of-living crisis, Mr Andrew replied: “The short answer is no. It is the opposite in some ways. It is really coming down to that long trend of premiumisation. We do expect that to continue, and it is showing in our results. Big categories like Scotch and Tequila are really benefitting from the premiumisation trend. People see it as an affordable luxury.”
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Diageo said yesterday that price increases and supply productivity savings had more than offset the impact of absolute cost inflation on gross margins in the first half.
Mr Andrew noted that the company has benefitted from its “global scale” as it has strived to manage well-documented cost increases, as well as the “expertise” of its supply-chain team.
He highlighted long-term relationships with suppliers which have allowed it to put mechanisms in place that have helped it to expand operating profits, price increases, and the benefits of hedging on commodities and fixed-price contracts.
Meanwhile, asked to comment on Scottish Government moves to restrict alcohol advertising and promotions in Scotland, Mr Andrew said the company is “deeply concerned by the proposals”.
He added: “They really will do little to support those that need help right now and significantly impact vital sectors like Scotch whisky [which] is such a big exporter and driver of the economy in Scotland and the UK, hospitality, tourism and sport. We’ll be working as closely as we can with the SWA (Scotch Whisky Association) and other industry bodies to make sure the Scottish Government sees sense.”
Chief executive Ivan Menezes said Diageo had made a “strong” start to the year. “As we look to the second half of fiscal 23, whilst the operating environment remains challenging, I remain confident in the resilience of our business and our ability to navigate volatility,” he said.
He added that Diageo was positioned well to deliver net sales growth of 5-7% in the medium term and organic operating profit growth of 6 -9% for the next two years.
Shares in Diageo closed down 5.6%, or 206p, at 3,469p.
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