(Bloomberg) -- Diageo Plc shares dropped after the maker of Johnnie Walker whisky reported a slowdown in sales in North America, raising concern that a key motor for earnings growth is sputtering.

Sales rose 3% on an organic basis in North America in the six months through December, missing analysts’ estimates. The region was the source of about half of Diageo’s earnings last year. Diageo shares fell as much as 6.1%.

“We think that the US miss is the most significant element of these results,” wrote analysts at RBC.

A drop in consumption in the North American market challenges Chief Executive Officer Ivan Menezes’s investor case that spirits are affordable luxuries and hence will remain resilient amid the cost-of-living crisis. Menezes said U.S. households have room in their budgets for the occasional bottle of spirits, as the average household spends only $1 a day on such products. However, volume declined 4% in North America during the period, led by vodka, Canadian whisky and Scotch.

The slowdown in that region overshadowed a beat in total sales growth, which reached 9.4% on an organic basis. However, volumes rose slightly less than analysts expected, which could be a signal that Diageo’s pricing power has limits.

“In some markets the rate of growth of premiumization has started to moderate,” Chief Financial Officer Lavanya Chandrashekar said on a call with journalists.

Some of the decline in the region was due to a difficult comparison to the year-earlier period, when bars and restaurants were restocking as Covid restrictions were easing.

Diageo isn’t relying just on pricing to offset the effect of higher raw material costs, Menezes said in a Bloomberg TV interview. In some markets, the price increases are less than the rate of inflation. Diageo is also trying to offset the pressures through productivity improvements, which reached £220 million in the semester. A better mix of products and volume growth can also help, according to Menezes.

“All of those give us levers that enables us to offset inflation,” the CEO said.

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The company maintained its forecast for annual growth of 5% to 7% in sales and 6% to 9% in operating profit in the three years through fiscal 2025, on an organic basis.

 

 

 

 

 

--With assistance from Anna Edwards.

(Updates with CFO comment in sixth paragraph, CEO comments in eighth and ninth)

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