Brazilian Blues at Diageo Towers

With trouble in South America flagged up in November, Diageo's latest half-year results were bound to be disappointing, especially for Scotch. But, as Tom Bruce-Gardyne reports, the tantalising prospect of an FTA with India could lift the mood no end …  

Six months ago, Diageo posted strong growth in Scotch whisky in its last set of annual results (FY23). Its flagship whisky brand, Johnnie Walker, appeared unstoppable with net sales up double-digits in all regions apart from North America. In Latin America and the Caribbean (LAC), it jumped 16%, and yet here alarm bells were surely ringing loud and clear by then.

At the company's latest half year results (HY24) announced on Tuesday, CEO Debra Crew conceded the point. Taking the key market of Brazil, she said: "Scotch, coming from Scotland, came in the first half of the year in time for summer and the Carnival [in February]. This was going to be big, and then it wasn't." With the country's supply chains stuffed with whisky, the pull factor of consumer demand never materialised.

The issue that LAC might be 20% down in these half-year figures led to a profit warning in November and a sharp fall in Diageo's share price. On Tuesday we learnt the actual figure was 23% down. The region accounts for a tenth of the company's overall net sales, but a quarter of its Scotch business. "We didn't do good enough in that market," said Crew who promised that inventory would return to "appropriate" levels by the end of this fiscal year.

In fairness to Diageo, Latin America has always been a volatile market for Scotch and the company's brands were enjoying booming sales and trading up just prior to this latest, painful contraction. Longer term, it may be that vastly more important market of North America which proves to be more of an issue, especially if the great premiumisation party has run out of juice.

Of course, Debra Crew is having none of that despite US sales of Johnnie Walker falling 13% over the period while single malts slumped by 27%. At the results press conference, she told me, somewhat obliquely: "The Johnnie Walker numbers have a little bit of noise in them," before adding, it's "doing very well" in terms of market share, and that: "The brand is gaining share of total spirits, even though Scotch, as a category, is not."

In the US, she said: "The ‘super premium-plus' category is the fastest growing. If you look at ‘premium and below' it's actually in decline, and that's across the whole spirits industry. So, premiumisation is still there, but I'd say consumers are being smart in how they shop. They're being very choiceful, so we are seeing a lot of normalising activity." Perhaps ‘normalising' is the new ‘premiumising'?

Crew conceded there had been some downtrading in single malts. "When you get over US$100, that's where we are seeing some consumer pressure," she said. Presumably, the same applies to Johnnie Walker Blue Label which currently retails for US$175-200. However, Buchanan's, Diageo's other big blend here, had a bumper six months with net sales up 36%. The brand has a strong Hispanic following, and its Buchanan's Pineapple variant, launched last February, has been a big hit.

Diageo's overall Scotch whisky business shrank 10% by volume and value over the period largely thanks to its steep drop in LAC. Johnnie Walker, which posted an impressive 10% net sales gain in Europe, declined 5% globally. Buchanan's fell 11%, single malts and Black & White were down 12%, and J&B dropped by 17%.

Having reaped the rewards of Latin America, where it dominates the whisky trade, Diageo was particularly vulnerable to any downturn there. Meanwhile, over in India, it is poised to benefit most among the big Scotch players from a cut in import tariffs if and when the longed-for Free Trade Agreement (FTA) is ever signed with the UK.

As Dan Mobley, Diageo's global corporate relations director, put it at the results on Tuesday: "It's always the hope that kills you." He has been following the achingly slow progress between the two countries since negotiations kicked off after Brexit in 2016. "We understand that both sides are negotiating in good faith, and they've made a lot of progress across the whole deal," he said.

"We're not aware of any particular sticking point relating to Scotch, but we know the time period is quite narrow, and the signals have been sent pretty clearly with elections for both countries this year. If we don't make progress in the next month or two, it will probably move to next year."

Right now, he puts the odds of an FTA in 2024 at 50:50. If it does happen, the 150% tariff will most likely halve. Diageo's CFO, Lavanya Chandrashekar, explained that the current rate adds "about 15%" to what Indians pay for a bottle. "So, of course it's going to make a meaningful difference. We've already seen, even with the existing tariffs, Scotch has done extremely well in India – up 16% this half."

Unlike that other huge emerging market of China, where a nation of white spirit-drinkers has to be painstakingly weaned onto whisky, there is no such issue here. "No-one in India needs to be introduced to Scotch," said Chandrashekar. "Everybody knows it, and everybody aspires to it."