FOCUS-Diageo faces fight to regain investor confidence as Mexican sales slow

*

Shareholders frustrated by build-up to profit warning

*

Shares have failed to recover after warning

*

Diageo's October sales miss forecasts in Mexico -source

*

Demand for top brands lagging cheaper ones in Mexico

*

'Buen Fin' premium spirit sales muted -wholesalers

(Adds shares in paragraph 18)

By Emma Rumney and Isabel Woodford

LONDON/MEXICO CITY, Dec 20 (Reuters) - Diageo faces a battle to win back some investors' trust following last month's profit warning as the Johnnie Walker whisky and Tanqueray gin maker tries to revive its struggling Latin American division.

Diageo warned last month that sales in Latin America and the Caribbean would fall by over 20% during the first half of its fiscal year, partly blaming a build-up of unsold stock in Mexico.

That caused its shares to fall to near three-year lows. They are down 22% year to date and have been treading water since last month's warning.

Five Diageo shareholders told Reuters they were not happy with the way the company handled the run-up to the warning.

The company, which also makes Don Julio tequila, had said trading was in line with expectations at the end of September. It only became aware there was an issue when October orders were lower than expected, it said later.

"They should have done their homework better," said Christian Diebitsch, a fund manager at Diageo investor Heptagon Capital.

Diageo executives have said that they had limited insight into sales at Mexican retailers and wholesalers, meaning the problem only became obvious when it was too late to reverse.

The holiday season is critical for Diageo re-establishing sales momentum in Latin America, but demand for premium brands like Johnnie Walker and Tanqueray gin continues to lag cheaper alternatives, according to Mexican wholesalers.

That makes it harder for wholesalers to clear bloated inventories.

Sales of spirits in Mexico were below Diageo's expectations in October, according to one source familiar with the matter, adding this was worrying given some key accounts had built up five months' worth of stock in preceding months.

The source declined to be named because they were not authorized to speak on the issue.

Mexican wholesalers said that, across the industry, premium spirit sales were slow as cash-strapped drinkers opted for cheaper booze.

Joan Manuel Garcia, e-commerce manager at alcohol wholesaler Prissa, said his company's largest store had around 50% of its top Diageo labels left following Mexico's "Buen Fin" weekend from Nov. 17 to Nov. 20.

Its premium spirit sales were flat versus last year, he added.

At a Mexico City outlet of wholesaler Alianzia, the store manager said the shop still had 85% of the premium alcohol stock it had in early October after "Buen Fin".

"Buen Fin", a campaign modelled on Black Friday, made November the strongest month for online alcohol sales in Mexico last year, data from market researcher NIQ showed.

Diageo will provide an update on its business in Latin America and the Caribbean, including actions being taken there, when it reports first-half earnings on Jan. 30, a spokesperson told Reuters.

Its shares rose in line with the market on Wednesday, to stand 1.3% higher at 0843 GMT.

SHAKEN CONFIDENCE

The five investors said the lapse in Mexico had shaken their confidence in Diageo's leadership and increased scrutiny on Diageo's new Chief Executive Debra Crew, who took the helm in June following the death of Ivan Menezes.

Some investors pointed to bigger problems for the company, including declining market share in its top market, the United States, and a slowdown in growth worldwide following a post-COVID boom in premium spirits.

Crew, a former military intelligence officer, has spent 25 years in consumer goods, including as chief executive of U.S. tobacco company Reynolds American.

Her 2020 job as Diageo's North America president marked her first executive role in spirits. Previously, she worked at PepsiCo and spent two years in non-executive roles.

"The question for me is does have the right framework to navigate through such rocky terrain," said Johannes Hesche, a portfolio manager at Acatis, another Diageo investor.

Positive news from the company's scheduled January update is critical to regain investor trust, Moritz Kronenberger, a portfolio manager at Germany's Union Investment, another Diageo shareholder, told Reuters.

"Show me the results and then I can believe in the growth of the stock again," he said.

(Reporting by Isabel Woodford in Mexico City and Emma Rumney in London; Editing by Matt Scuffham and Emelia Sithole-Matarise)