“It was no doubt a challenging year,” Diageo CEO Debra Crew said discussing the group’s 2023/24 fiscal performance this week at its UK headquarters.

The Ciroc vodka owner made the headlines on Tuesday (30 July) with its first annual sales dip since 2020, feeling pressure most on its businesses in Latin America and the Caribbean (LAC).

Total group sales for the full year 2024 dropped 1.4% to $20.27bn. On an organic basis, they were down 0.6%.

LAC sales were down 15% at $1.7bn, while volume sales declined 16% during the year, causing a 5% dip at a group level.

The Guinness and Johnnie Walker maker had already warned last November that it expected to see “a materially weaker performance outlook” for its LAC operation in the first half of the 2024 fiscal year.

Alongside the dips in LAC, the group also saw dips in North America, where its annual net sales dropped 2% on a reported basis to $7.91bn, with volumes down 4%. In a statement accompanying Diageo’s full-year results, Crew linked the declines “to a cautious consumer environment and the impact of lapping inventory replenishment in the prior year”.

While the group says it has already started a process “to manage the inventory issues in LAC” as well as investing in building up its “transformed distribution network” in the US, analysts stressed that the overall outlook for Diageo’s fiscal 2025 is hazy. Stiefl’s Cedric Lescable described the results as “another warning”, adding that “next year's guidance is not precise, but it flags that FY24 hurdles are likely to persist”.

What’s next for US consumer confidence?

When it came to Diageo’s drop in US sales, Crew was keen to highlight the tough economic environment which was still taking a toll on consumer choices and influencing a trade down to cheaper products.

Speaking to reporters at the company’s London base on Tuesday, Crew said: “Unlike in Europe, where we’re starting to see inflation moderate more, you still see inflation [in the US]. In particular… food prices and food basket prices in the US are still quite high… Some people say it’s a 30-year high, so that’s really impacting confidence.”

When asked by Just Drinks when the company expected consumer confidence to return to normal, Crew was hesitant to settle on a specific timeline.

“I wish I had a crystal ball”, she said. “I said six months ago, I thought in the US it would take six months to 18 months. Well, I know it’s not six months now. I’m not going to update that really any further.”

A number of factors could determine improvements in the next fiscal year, such as interest rate cuts from the Federal Reserve, “which they're only going to cut if they start to see inflation come down a little bit”, she said.

“When we get past elections, you could see this start to come back. But... it's too difficult to call.

“What we're trying to do is control what we can control. What we see as really important is looking at how our brands are performing”.

Distribution transformation

In a bid to up sales in North America, in its full-year presentation Diageo highlighted that, together with its two largest US distributors, it had invested an unknown amount into developing a “transformed distribution network” for the market.

The move, Crew said on Tuesday, looked to better prepare the group for “the next ten years of growth”, as the move would give it access to a mixture of sales data from “hundreds of thousands of outlets in the US”, as well as its own consumer insights and “demand radar”.

“If you think about the pandemic, post the pandemic, things have changed. You actually see geographic migration within the US and [in] some different areas you [see] socialising has changed. There's a lot of what we call third spaces, so it's not just in bars and at home anymore… think about food trucks that will pull up in a park and that type of thing. So, there's a lot of new places where we want to activate our brands and grow our brands.

“Taking all of that into account… in some cases, it's been a net add, so we're putting more people out in the right places. Going down to kind of zip code level against the brands and the channels where we see the most opportunity. And we're really [increasing] that part of our system.”

Premium “feeling the pinch”

At the time of Diageo’s H1 results in January, Crew said the group was still confident about its premiumisation strategy.

At the time, she said: “We believe in premiumisation. The US market is a good example of this super-premium-plus price. That’s what’s growing. If you look at premium and below, it’s actually in decline.”

She also spoke of so-called “aspirational consumption that is really working its way out”, as consumers become more wary of their spending.

On Tuesday, Crew told reporters that the company was hopeful that these consumers “will come back as the economy improves”. She added however that the higher-priced bottles in their US portfolio “are definitely feeling the pinch”.

Emphasising the tough nature of the US at the moment, Crew also highlighted, “especially in a market like the US where you do have American whiskey, that's also really flying… we've got Canadian whiskey as well. There's just a lot of competition in that.”

Besides the US, Crew also spoke of a loss in market share in Australia and Canada, where the group was selling several ready-to-drink products. “In some of these areas we either didn’t have the right portfolio choice and we’ve seen some downtrading that didn’t come right to our portfolio”, she said.

“But the market teams work on it, you know the other thing is, you have to give competition credit. You can’t count on this stuff. It is a daily kind of fight out there to get that market share.”

Tequila “still a hot trend”

Diageo’s Tequila business booked a 5% total dip in net sales year-on-year in the US, driven by a 22% drop for Casamigos in the region. Crew however remained confident about Tequila’s future in the market, citing a lag in restocking as the main reason for the dip.

When asked by Just Drinks how Diageo planned to recover its Tequila sales in fiscal 2025, Crew said: “We’re feeling much better about [it] than what our numbers would show”.

She added: “+7% for Tequila as an industry in the US is still a very hot trend. [There’s] lots of runway, it still has like two-thirds, maybe not even two-thirds of household penetration compared to vodka.”

Commenting on UK Tequila performance, Nuno Teles, managing director for Diageo Great Britain, said: “For the first time ever, Margarita is in the top ten cocktails… it’s really a drink of choice here in the UK and the Don Julio is clearly driving [this]. It’s the fastest-growing Tequila in the premium sector”.  

Could Diageo “fall further”?

While the Baileys Irish cream liqueur maker is confident it will eventually return to more positive sales and volumes, the group didn’t provide much detail in its outlook that confirmed to analysts that further declines were out of the question.  

In a note released yesterday (31 July), Bernstein analysts said they still “believe the stocks will fall further”, adding they had “not been reassured on the short- to medium-term outlook”. The financial advisory group reduced its earnings per share expectations by 13%.

When it came to LAC, they predicted an eventual “bounce-back from the destocking comps”. Reflecting on the US market, however, they stressed: “Underlying trends are not showing signs of inflection in North America, and we do not expect a recovery before the end of CY2024”.

The Talisker Scotch and DeLeón Tequila maker is far from being out of the woods just yet.