By Richa Naidu
LONDON (Reuters) - Diageo, the world's largest spirits maker, signalled on Thursday that robust demand for its drinks as people made pricey cocktails at home during COVID-19 lockdowns may be slowing in some parts of the world, particularly North America.
Its shares dropped almost 7%, shaving about 5 billion pounds ($6.2 billion) off the company's market value even as Diageo posted forecast-beating first-half sales thanks to price hikes and as more people drank premium spirits.
Since the pandemic, Diageo has benefited from people splurging on more expensive types of alcohol while staying home under lockdown. The company and its rivals invested heavily in marketing and improving their products to capitalise on newfound demand, focusing on premium brands such as Bulleit Bourbon and Don Julio tequila.
But Diageo's North America business, which accounts for nearly 30% of overall sales, reported organic sales growth of 3% in the six months ended Dec. 31 versus analyst estimates of over 6%.
The company said it expected North American organic net sales growth to "continue to normalise through the second half of fiscal '23, compared to the double-digit growth in the prior period".
Its shares were last down 6.6%, making it the morning's biggest loser on the FTSE index. They hit their intraday low at 1027 GMT, around the end of the company's analyst call, during which eight people asked Diageo about the state of its U.S. business.
"North America is such an important and high margin part of Diageo that even though the group as a whole beat organic sales estimates comfortably, we think that the U.S. miss is the most significant element of these results," RBC Capital analysts said in a note.
Barclays analyst Laurence Whyatt said the market was surprised by the results because investors "don't really believe the European consumer is a sustainable consumer that can make up for the weakness in the U.S. because of the cost of living crisis".
Still, overall organic net sales rose 9.4% in the six months to Dec. 31, beating analyst forecasts for a 7.9% rise. Diageo's "premium-plus" brands - which are more expensive than brands such as Smirnoff vodka but under about 50 pounds ($61.92), drove 65% of its organic net sales growth, the company said.
The spirits market has been resilient amid a global cost of living crisis that has otherwise hit volumes at other consumer goods companies, with people continuing to buy what they consider occasional treats for themselves even as they trade down to cheaper food brands.
Diageo, which makes Tanqueray gin, Johnnie Walker, Captain Morgan's rum and Ketel One vodka, also said people were returning to pubs, bars and restaurants in most parts of the world versus towards the end of 2021, when some countries still remained under lockdown.
"The consumer is coming back to on-trade in a very big way around the world," Chief Financial Officer Lavanya Chandrashekar said in an interview with Reuters.
GRAPHIC: Europe's spirits makers rally - https://fingfx.thomsonreuters.com/gfx/mkt/jnpwywnnbpw/diageo.PNG
($1 = 0.8076 pounds)
(Reporting by Richa Naidu; editing by Jason Neely and Emelia Sithole-Matarise)