Diageo (LON: DGE) (NYSE: DEO) shares fell 12% at the end of last week. This was the result of a trading update and the news there was not good: “In four of our five regions, momentum continues, however at a group level we now expect slower growth in the first half of FY24 than in the second half of that FY23. This is due to materially weaker performance outlook in Latin America and the Caribbean (LAC), which accounts for almost 11% of Diageo’s net sales value (FY23) and is now expected to see a decline in organic net sales of more than 20% year-on-year in the first half of FY24.”
Okay, so it’s one business segment that’s slowing down, the others are expected to do well. 12% could therefore be considered a bit excessive. But it weighed on the entire sector: “More than £15 billion was wiped off the market value of Europe’s biggest drinks makers today after Diageo warned of a sudden collapse in demand for its spirits.” The owner of Gordon’s and Smirnoff said sales in Latin America was expected to decline more than 20% year-over-year, prompting the company to cut its profit forecasts.”
So the market doesn’t think it’s just because people are leaving Gordon’s. Instead, they assume that this is the case, at least across the industry in this region. Which then leads to the bigger question: Will this be economy-wide in this region?
diageo
Diageo share price from Google Finance
This needs to be decided. We all know there will be a recession at some point. Just because the business cycle exists and therefore we will experience a recession at some point. But it is almost impossible to predict a recession. According to standard economic statistics, we often don’t know we are in such a situation until it has already happened and is almost over. The only clue we get is these company forecasts of likely future sales.
This is not so much due to companies’ foresight, but rather because one of the main causes of a recession is destocking in the supply chain. The company assumes that sales will be lower and therefore produces less. The fact that there is less production is actually the recession. Now if this happens in one sector – alcohol – in one region – Latin America – then that is not a recession. But when many companies in many regions think the same thing, then it is a global recession.
And we are seeing a number of companies lowering their forecasts for likely future revenue. And thereby reduce their production. That’s the big unknown here – are we just seeing sectoral changes or is this a broader statement about the global economy? At this stage it is still something to think about and think about. But it’s worth thinking about what we would do if the recession were coming right now.
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