Diageo (LON: DGE) (NYSE: DEO) shares dropped 12% at the end of last week. This was the result of a trading update and the news there was not good: “We have momentum continuing in four of our five regions, however at the group level, in the first half of fiscal 24, we now expect to see slower growth than the second half of fiscal 23. This is due to a materially weaker performance outlook in Latin America and Caribbean (LAC), which is nearly 11% of Diageo's net sales value (fiscal 23), and is now expected to decline organic net sales by more than 20%, year-on-year, in the first half of fiscal 24.”
OK, so it’s the one segment of the business that’s slowing, the others are expected to do fine. 12% might be seen as a bit of an over reaction therefore. But it dragged the whole sector down: “More than £15 billion was wiped from the market value of Europe’s biggest drinks makers today after Diageo warned of a sudden slump in demand for its spirits. The Gordon’s and Smirnoff owner said sales Latin America were expected to drop by more than 20% year-on-year, causing the firm to slash its profits forecasts.”
So the market is not thinking that it’s just people are going off Gordon’s. Instead they’re thinking that this is at least sector wide in that geography. Which then leads to the larger question - is this going to be economy wide in that geography?
Diageo share price from Google Finance
This is the thing that needs to be decided upon. We all know that at some point there’s going to be a recession. Just because the business cycle does exist and therefore, yes, at some point we’re going to get a recession. But it’s near impossible to forecast a recession. Often enough we don’t actually know we’re in one, from the usual economic statistics, until it has already happened and it’s near over. The one heads up that we do get is these corporate forecasts of likely future sales.
This is not so much because companies are prescient - it’s because one of the major causes of a recession is destocking in the supply chain. Business thinks sales will be lower so they produce less. That producing less actually is the recession. Now, if this is happening in one sector - alcohol - in one geography - Latin America - then that’s not a recession. But if many businesses are thinking the same thing in many geographies then that is a global recession.
And we are seeing a number of companies reducing their forecasts for likely future sales. And curbing their production as a result. This is the great unknown here - are we seeing mere sectoral changes or is this a more general statement about the global economy? At this stage it’s still just something to think about, to ponder. But it is worth thinking about what we’d do if that recession is in the process of arriving just now.