Currency Takes A Swig Out Of Profit

Image source: Madeleine Stuart / Finimize

What's going on?

Diageo – the global spirits giant – told investors on Thursday that its profit will be hit by recent drops in the value of emerging market (EM) currencies. Don’t raise your glasses.

What does this mean?

Diageo owns tipple brands like Smirnoff and Tanqueray that sell worldwide – including EMs across Africa, Asia-Pacific, Latin America and the Caribbean. Those markets aren’t small fry for Diageo either – they made up over 40% of its total revenue last year.

When investors start selling one EM currency, it can affect several. Investors tend to group EMs together, so some economies that are holding up well end up suffering the negative consequences of other markets doing poorly. This hurts Diageo’s revenue and profit because the money it makes in EMs is worth less when it’s translated back into Diageo’s home currency, the British pound. Almost a third of Diageo’s sales come from the US. Since the dollar’s increased in value against most currencies this year, its US profits are worth more – softening the EM blow.

Why should I care?

For markets: Currency impacts can be big.

Diageo said currency woes would take $230 million off revenue and $60 million off profit (that’s about 1% of its profit, so it’ll notice it). Diageo’s shares rose despite the news, which might be because the hit was partly expected. EM currencies have been losing value for a while and the pound’s been gaining as investors move their money into the UK, perhaps to take advantage of rising interest rates.

The bigger picture: The EM fallout isn’t over yet.

Headlines on EM currencies’ slide may have slowed but the impact’s likely to be felt for a while because businesses can’t always react immediately (it’s tough to increase prices by 20% overnight to make up for any shortfall). US-based companies (with the dollar as their main currency) that have global businesses are most at risk of sharing Diageo’s fate. Watch out, Nike and Apple.

Originally posted as part of the Finimize daily email.

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