Today I am looking at why Diageo (LSE: DGE) (NYSE: DEO.US) could be a poor investment for savvy share pickers.
Here are two numbers that I think help make the case.
1 billion
On the back of surging demand for Scotch whisky from developing markets, back in 2012 beverages giant Diageo announced a huge expansion programme for production north of the border. The company — which produces Johnnie Walker, Talisker and J&B in Scotland — intended to spend around £1bn over the next five years to boost the flow of the drink from the country.
However, Diageo announced this week that
“the weaker global economic environment has impacted the growth of Scotch in certain markets and therefore Diageo will continue to review and adjust the timing of the next phase of our investment programme to manage our Scotch whisky inventory and to retain the alignment between growth in production volumes and growth in demand.”
As a result Diageo has now put plans for a brand new £50m malt whisky distillery at Teaninich in the Scottish Highlands, as well as a string of other extensions and improvements to existing facilities.
The business has been hit hard by a number of troubles in critical overseas territories, from the impact of anti-extravagance measures in China through to weakening currencies in key markets — indeed, the Russian rouble slid to its lowest on record this week owing to the enduring political crisis in Ukraine.
I remain convinced that a backcloth of rising population growth and increasing personal affluence levels — and with it demand for luxury goods including Diageo’s premium labels — bodes well for long-term growth. But the company’s ditched expansion plans this week highlight the macroeconomic turbulence which threaten sales performance in the meantime.
0.1
Diageo announced in this month’s interims that organic net sales slumped 1.5% during July-September, with volumes across the globe falling by an alarming 3.5% during the period. The headline-grabbing number during the period was a colossal 7.4% collapse in sales in Asia Pacific, although I believe that stagnation in its critical North American market should be equally alarming.
Although Diageo noted that
“our reserve brands and our innovations continue to perform well, consumer demand for mainstream brands is still constrained by weak consumer confidence in average income households.”
Sales in North America edged just 0.1% higher in the last quarter, slowing from expansion of 3% in the year concluding June 2014. With Diageo sourcing more than half of group profits from this one market alone, signs of continued slowdown here should come as a major worry.
