Spirit suppliers got a brief reprieve when President Donald Trump delayed tariffs with Mexico and Canada on Monday, but the threat of a trade war has still hampered the growth outlook for one of the industry’s biggest players.
Diageo announced in its earnings results on Tuesday that despite taking steps to deal with the potential impact, the possibility of tariffs are weighing on the group’s recovery, resulting in a withdrawal of its 5% to 7% sales growth target.
Tariffs could result in a $200 million hit to the second half of the fiscal year’s operating profit if they do come into effect in March, according to Diageo’s Chief Financial Officer Nik Jhangiani.
He added that the group had implemented a number of strategies to offset the impact including reallocating investment, supply chain adaptation, inventory management and pricing strategies.
Even with those plans, the potential tariffs “add further complexity in our ability to provide updated forward guidance given this is a new and dynamic situation,” said Diageo CEO Debra Crew.
Diageo is more vulnerable to tariffs than other major spirits players, as the group has built itself into a tequila powerhouse. Nearly half (45%) of the group’s U.S. sales come from Mexico and Canada, and of the possible $200 million loss, 85% would be from tequila, said Jhangiani.
Those brands with specific geographic-origin requirements in Mexico and Canada are also among the group’s only bright spots. Tequila net sales in the U.S. were up 23% in the first half of FY 2024, with Don Julio offsetting Casamigos’ declines. Canadian whiskey Crown Royal showed the only other positive growth numbers for the spirits portfolio (3%) in the U.S. The rest of the major spirit brands were down worldwide, with gins Tanqueray and Gordons, and Smirnoff vodka showing the biggest declines.
The news comes at a time when Diageo was already under pressure from investors after post-pandemic dips and a surprising slump in Latin American sales in FY 2023. Like other spirits groups, Diageo has been offloading underperforming brands, such as Pampero rum and Safari liqueur. Recent rumors have speculated that the group was also selling its minority share in Moët Hennessy, the wine and spirits arm of LVMH, and top-performer Guinness. The group said it has no intention to sell either in an official statement last week, and did not elaborate on the call with investors.
Guinness has now achieved its eighth consecutive half of double-digit growth, delivering 17% organic net sales growth in the period. To meet the continued strong demand for Guinness 0.0, the group said it is doubling its original investment to expand capacity.
Overall the group saw a 0.6% decline in the first-half reported sales to $10.9 billion. Operating profit fell to $3.2 billion, 4.9% lower than the same period last year.