Diageo’s cautious outlook for 2020 reflects the geopolitical issues impacting the industry at large

Uncertainty in the global environment for trade has prompted Diageo to downgrade its sales forecast for the year, with volatility in travel retail, the Americas, and India contributing to the group’s more cautious outlook.

In the six months to 31 December 2019, the Johnnie Walker and Smirnoff maker saw its organic net sales increase by 4.2% to £7.2 billion. However, growth was slower compared to the same period in the previous year, when organic net sales increased by 7.5%. According to Diageo, this “outperformance” was in part thanks to a more stable trading environment.

Referencing the latest set of results, Kathryn Mikells, CFO at Diageo, said: “If you look at what we’re seeing in the first half, I would say we’re seeing more volatility across the world and that’s impacting our results, and we’re not expecting that situation to necessarily improve in the second half.”

As such, the group now expects organic net sales growth for the full year (the 12 months to 30 June 2020) to be “towards the lower end” of its 4-6% guidance. Previously, the group forecast that growth would sit in the midpoint of this range.

The outbreak of coronavirus in China is one example of an external event that is compounding this sense of instability and unpredictability in the industry. Ivan Menezes, CEO of Diageo, said the outbreak “will impact” the group’s performance, but added that “it’s too early to be able to quantify” at this point.

Drawing comparisons to the SARS outbreak in 2003, IWSR recently warned that coronavirus could have a significant impact on global travel retail. According to Mark Meek, CEO of IWSR, while coronavirus is a key concern for Diageo and other international distillers, at this point, “no-one can predict its likely impact”.

Due to the impact of SARS in 2003, IWSR figures show spirits volumes in the travel retail channel in Asia-Pacific fell by 1.6%, picking up again by 5.9% in 2004 and 5.2% in 2005. Cognac and Scotch, key categories for the Asia-Pacific travel retail market, suffered similar fates; Cognac volumes fell by 7.3% and Scotch fell by 1.5% in 2003. Both categories picked up considerably in 2004, with volumes increasing by 7.0% and 6.1% respectively.

Further disruption to the travel retail channel would augment the difficulties Diageo is already experiencing in the sector: in H1 2020, the group’s travel retail business in Asia and the Middle East declined by 18% due to “challenging trading conditions” – specifically reduced passenger traffic through Hong Kong relating to the political demonstrations that are ongoing in the region.

Like many consumer goods leaders, Diageo has experienced headwinds in India, where it is the largest distiller by volume. The nation’s economic growth has slumped to its slowest pace in more than a decade, impacted by sluggish consumer demand. Diageo’s sales growth in India slowed to +2%, compared to +12% for the same period in the previous half year.

However, the IWSR’s Meek stressed that India is a resilient market and still holds much promise for distillers. “A softening of the Indian economy does appear a reality, but the Indian beverage alcohol industry has proved itself nothing but nimble in overcoming obstacles many times in the past, and there is still a lot of per capita consumption to be developed in a giant market of nearly 1.4 billion people,” he said.

In North America, Diageo’s net sales increased by 6% despite vodka’s drag – its vodka brands were down by 5% in the region and 1% globally. However, the group’s H2 performance in the region could suffer from the continuing tariff war between the US and EU, which has seen single malt Scotch and American whiskey slapped with punitive measures.

According to IWSR data, the US is the biggest value market for total Scotch whisky, and is the biggest volume and value market for single malt Scotch, which now faces a 25% import tariff in the US.

Humphrey Serjeantson, research director for western Europe at the IWSR, said Diageo is “better placed to absorb these tariffs” thanks to the diversity of its portfolio. He added: “A producer of only single malt Scotch has nowhere else to go in terms of categories, so overall will have a much harder time of it.”

As a global distiller, Diageo is facing hardship on a number of fronts, but its variety of categories, brands and price points means it is able to spread the risk.