One of the world’s largest beverage companies has provided a rare insight into the challenges of undertaking supply chain management in emerging markets. Diageo, which owns drink brands such as Guinness, Johnnie Walker whisky and Smirnoff vodka, shocked investors with a Trading Update announcement in November, revealing that sales in Latin America had reduced by 20% due to a post-World Cup reduction in consumption, lower economic activity and down-trading by consumers to lower premium brands.
Whilst all these factors are some of the normal risks of doing business, what particularly unsettled investors was the lack of management’s supply chain visibility in the region, leaving them seemingly unprepared for the downturn. This resulted in an initial drop in share price of more than 10%.
A disconnect with the end-buyers of its products is at the heart of Diageo’s problems. The drinks company generates most of its sales in the region through wholesalers and distributors. As the headwinds have grown, channel partners have reduced their inventory to what Diageo called ‘appropriate for the current environment.’
In its update, management commented, ‘While we have good visibility in inventory levels through our distributors, we have less visibility to inventory at wholesale and retailers that they sell to. Latin America is one [region] where our point of sale information is much more limited.’ In other words, consumer demand is decoupled at the distributor level within the supply chain. What appears to have happened is that wholesalers increased their inventory holdings during a period of low inflation/low interest rates and are now de-stocking. Diageo’s management was unable to tell the difference between ‘true consumption’ and orders which had been placed to take advantage of the low interest rate environment caused by the ‘Covid super cycle’. Management only recently became aware that there was more inventory being held in ‘opaque levels’ below distributors than they had anticipated.
Another of the problems relates to the type of product Diageo is selling into the Latin American market: mostly whisky. This type of drink has a long shelf life which means it can be in distributors’ interests to buy cheaply and store it as prices go up. In contrast, Diageo has a completely different market profile in Africa where sales of Guinness are very important. This drink needs to be sold quickly to avoid going stale and so requires an alternative channel strategy and results in different partner behaviour.
Diageo’s headache demonstrates how difficult it can be to grow a business in emerging markets with a fragmented and complex downstream supply chain. The company’s management would say that the model has worked well to date and it is only a unique set of circumstances, post-Covid, that has created this problem. They also stressed that they use other techniques to assess consumer (end-user) sentiment, such as surveys, which feed back into production strategies. However, the whole episode is a timely reminder that the reality of supply chain management in many parts of the world is far removed from a paradigm of perfect visibility. Although technological advances and new platforms may produce more accurate data at every supply chain level, more channel partner collaboration will also be needed to ensure greater levels of future resilience.
Author: John Manners-Bell
Source: Ti Insights
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