Diageo’s New Finance Chief Faces Pressure to Reassess Sales Goals
As the world’s top spirits maker prepares to report its interim results on February 4, all eyes are on Nik Jhangiani, Diageo’s new finance chief, to reassess the company’s medium-term sales goals. The current targets, set in 2021, aim for 5% to 7% annual sales growth, but some investors believe this may no longer be realistic given the sector’s sliding sales.
A Shift in Consumer Behavior
The drinks industry is facing significant challenges, with high inflation and interest rates forcing consumers to cut spending. Diageo’s organic sales declined 0.6% last year, and the company’s new CEO, Debra Crew, has acknowledged that it’s hard to predict when the current challenges will recede.
Investors Doubt Ambitious Targets
Four investors, including Kai Lehmann, a senior analyst at Flossbach von Storch, have expressed doubts about the upper end of Diageo’s goal. Lehmann believes that 7% annual sales growth is “hardly achievable” in the medium to long-term. Another top 40 investor suggests that Diageo should lower its target growth rate to 4%-6%.
A Reset for the Industry?
When Diageo set its growth target, the industry was enjoying a COVID-19 boom. However, the current economic climate has forced a reevaluation of the company’s ambitions. Crew defended Diageo’s goals in July, citing long-term growth drivers such as population increase and rising incomes in emerging markets. However, some investors believe that these drivers may not be as robust as hoped.
Short-Term Pain for Long-Term Gain?
A cut to Diageo’s sales targets could indicate that one of its growth drivers is not as strong as expected. While this may lead to short-term pain for the company’s share price, some investors believe it’s preferable to overly ambitious goals. As one investor noted, “We would always rather have companies set expectations conservatively and then exceed them.”
Long-Term Threats to the Industry
In addition to short-term economic challenges, the industry faces longer-term threats, such as consumers cutting back on drinking due to the impact of rising demand for weight-loss drugs. U.S. tariffs also pose a risk to sales. Diageo has faced additional challenges, including a profit warning and management issues.
Premium Portfolio Key to Growth
Despite the challenges, some investors believe that Diageo remains well-positioned to grow. The key question is whether the company can continue to push customers to more premium drinks at the same rate as in the past. The premium portfolio now accounts for over 70% of sales in developed markets, and its contribution to growth is expected to slow.
A More Cautious Approach
As Diageo prepares to report its interim results, investors will be watching closely to see if the company will reassess its sales goals. A more cautious approach may be necessary to reflect the current economic climate and the industry’s longer-term challenges.
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