Diageo's succession hangover has fuzzy duration
The authors are Reuters Breakingviews columnists. The opinions expressed are their own.
By Aimee Donnellan and George Hay
LONDON, July 30 (Reuters Breakingviews) -Diageo’s DGE.L seamless CEO succession looks increasingly frayed. Last year’s elevation of Debra Crew to the top job at the $67 billion Guinness and spirits maker was hailed as a shining example of how to hand over power. But in the last year the group’s share price has fallen 30%, and Tuesday’s results saw another 8% drop.
Diageo shares more than doubled under her predecessor, the late Ivan Menezes, who ran the company from 2013. But Crew hit problems soon after commencing the top job in June 2023. In Latin America and the Caribbean, which accounted for 9% of Diageo’s $28 billion of sales in the year ending June 30, higher interest rates ate into consumer spending and saw drinkers trade down from expensive spirits to beers. By January Crew revealed demand for gin and whisky was also waning. While she has maintained a 5% to 7% medium-term target for the group’s organic net sales growth, in the year to the end of June that metric actually shrank.
Crew can argue Diageo’s headaches are not excessive relative to its rivals. Pernod Ricard’s PERP.PA share price is down 40% in the last year while Rémy Cointreau’s RCOP.PA is off 54%. In general China is displaying less appetite for foreign spirits. And U.S. consumers are reducing expensive discretionary spending.
Still, that’s the opposite of Diageo’s long-term assumption that richer consumers will increasingly buy pricier drinks. And Crew has arguably made mistakes. Weakness in Latin America was predictable as central banks from Brazil to Chile ratcheted up interest rates. To increase sales and encourage consumers to buy Diageo products, she could have hiked the company’s marketing spend in the region. Instead, in the six months ending December 2023, that metric declined by 19%. As a result Latin American and Caribbean sales fell by 21% in the year to the end of June.
Having just appointed a new finance director, Diageo is unlikely to part company with Crew in the immediate future. But a swift revival of the share price looks tough. One option is to focus more on beer, where Diageo saw organic net sales growth of 14% in the last year, against a 4% decline for spirits, and where producer share prices are faring better.
Unfortunately, spirits accounted for four-fifths of Diageo sales over the past year and North America constituted over 30%. And pivoting to beer may not do much for shareholder returns: including debt Crew’s group trades on 13 times EBITDA, but beer giants like Heineken HEIN.AS are valued below 10 times, according to LSEG data. Turning round Diageo — and making its succession a success — therefore hinges on the fuzzy question of when and if U.S. consumer will buy more liquor.
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CONTEXT NEWS
Diageo's shares fell more than 9% on July 30 as the spirits maker announced group sales down 0.6% for the year to June 30, with organic operating profit off 4.8%.
The maker of Johnnie Walker whisky and Tanqueray gin saw sales in the Latin American and Caribbean region fall 21.1% year-on-year — a slightly deeper decline than Diageo anticipated.
Chief Executive Debra Crew said Diageo had taken steps to resolve problems in the region and beyond, which she was confident would ultimately restore growth. However, she warned that factors that had hurt Diageo's performance, including low consumer confidence, could persist into next year, making it difficult to say when the company could return to its medium-term goal of annual sales growth of between 5% and 7% per year.
In North America Diageo sales fell 3%. It has been under pressure from investors to turn around market share losses in the United States, its biggest market.
The company's shares were trading at 23.09 pounds as of 0846 GMT, down 9.4%.
Diageo shares have lagged those of beermakers https://reut.rs/3A0AKEx
Spirit valuations are now closer to those of beermakers https://reut.rs/3WrAKVD
Editing by Neil Unmack and Streisand Neto
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