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Diageo warns of virus profit hit

Daniel Lane

Daniel Lane - Fidelity Personal Investing

Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.


Guinness-owner Diageo this morning said profits could take a £200m hit this year, due to the coronavirus outbreak.

The group, whose brands also include Johnnie Walker whisky and Smirnoff vodka, estimated that around 5% of last year’s total profits were in jeopardy as its Asian consumer base goes into lockdown.

The closure of bars and restaurants in China means one of the firm’s fastest growing markets is now at a virtual standstill. And with reduced volumes of events, conferences and overall tourism in other regions such as South Korea and Japan - which have seen outbreaks of their own - the group said it expects net sales to fall by £225m to £325m. Operating profit could see a drop of £140m to £200m, representing 5% of last year’s £4bn total.

The Asia Pacific region accounted for 21% of Diageo’s sales last year so it’s no surprise that disruption of this scale should have such an impact on near-term earnings. And the company isn’t alone in preparing the market for what could be a volatile period - both Nike and Apple foresee a hit to the bottom line, as the virus is disrupting both consumers getting to stores and the supply chains themselves.

The drinks giant said it expects normal Chinese consumption to stall until at least the end of March, estimating normal service to have resumed by the end of June.

What now?

Over the past 10 years of low interest rates investors have warmed to companies like Diageo with strong stables of brands, loyal consumer bases, high barriers to entry and good attention to dividend yields.

What investors now have to ask is, when things get back to normal as they did after the likes of the SARS epidemic, will companies exhibiting these characteristics be able to operate like they did before?

Short-term hits to profits seem inevitable at this stage but as long-term investors it is worth looking at the bigger picture.

Behavioural economics tells us that our decision-making over simple pleasures reverts to three things - what’s easiest, what’s quickest and what we liked last time. Apply that logic to the beverage market and you’re well on your way to understanding how global brands make sure our next glass has their logo on it. This is not to imply stellar growth - elephants don’t gallop after all - but the defensive traits markets leaders often demonstrate mean they rarely lose customers en masse if they weren’t the cause of the downturn.

What smaller competitors find difficult is gaining access to the same distribution networks, volume of vendors, marketing budgets and product familiarity among consumers as their larger counterparts. Investors need to ask whether phenomena like the coronavirus will meaningfully reduce these advantages among large sector leaders, or whether they can weather the storm in the short-term and eventually return to normal.

When market events are still unfolding it can be difficult to step back and examine the whole picture - because there isn’t a whole picture yet. What we can do is control our own actions and make sure we don’t act rashly.

For me that means remembering Annie Duke’s 10-10-10 rule. Ask yourself what the consequences of your actions might be in 10 minutes, 10 months and 10 years - even if you don’t know the answer the conversation should get you thinking longer term than you might have done.

More on Diageo

Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

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