Diageo’s drastic fix lacks fizz
BREAKINGVIEWS-Diageo’s drastic fix lacks fizz The author is a Reuters Breakingviews columnist. The opinions expressed are her own.
By Yawen Chen
LONDON, Aug 6 (Reuters Breakingviews) - Dave Lewis has unveiled the centrepiece of Diageo's DGE.L turnaround. Seven months after taking charge, the former Tesco TSCO.L boss nicknamed Drastic Dave by journalists announced a $1 billion cost-saving programme and a broader restructuring designed to revive the struggling drinks maker. Investors welcomed the plan, sending the shares up as much as 7%. However, finding savings is one thing; generating growth from them is another.
Lewis inherited a business whose pandemic playbook had stopped working. Whacking up prices, or “premiumisation”, delivered strong growth while consumers sat at home boozing. Since then, the U.S. spirits market has weakened, leaving tequila brands Casamigos and Don Julio under pressure. Diageo’s U.S. spirits sales have fallen 7% over the last six months, versus a 1.7% decline for the sector. Lewis also has little financial room for error, with debt exceeding three times EBITDA in the year ending June.
Lewis has made clear the $1 billion savings are intended to fund investment in innovation and improve Diageo's competitiveness rather than simply boost profits. That could mean cutting prices for some brands, and investing in new products like ready-to-drink cocktails. The approach is sensible; whether it is enough to materially improve Diageo’s outlook is another matter.
For one, it’s still not clear when the decline will end in North America, still Diageo’s largest market. Sales fell 8.4% in the year to June, and at over $7 billion still have scope to shrink further towards the pre-pandemic level of $5.7 billion. Luxury groups' recent rebound suggests affluent Americans are still buying handbags, jewellery and holidays. Diageo's problem may not simply be price but a structural decline: Americans may just be drinking less. And, with debt expected to be at least 2.5 times EBITDA in 2027 after disposals, Lewis may have little further room to cut prices or boost investment if the market continues to sour.
That helps explain Diageo's depressed stock price. Even after Thursday's rally, the shares trade around 14 times expected 2027 earnings, according to Visible Alpha, below brewer Anheuser-Busch InBev's ABI.BR 17 times and spirits peer Remy Cointreau's RCOP.PA 25 times. Lewis's overhaul should leave the company leaner and better positioned. But until Diageo can fix its U.S. hangover, it is likely to keep its groggy valuation.
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CONTEXT NEWS
Diageo announced a plan to save $1 billion over three years on August 6.
CEO Dave Lewis said in a recorded presentation launching the plan that a restructuring programme of this size has "very significant impacts" on colleagues, but did not say how many jobs would be affected.
The programme had mostly been communicated throughout the business around a month ago, Lewis, who took over at Diageo in January, said.
Diageo also said it would incur about $1.2 billion of restructuring costs as it works to address weakness in North America, its largest market, and optimise its supply chain.
"There is hard work ahead, particularly in North America, where improving performance is a clear priority, but we are confident we can deliver without taking a step back in operating profit," Lewis said in a statement.
Diageo reported a 2% drop in organic sales for the year ended June 30, in line with estimates, and forecast flat annual sales for fiscal 2027.
It expects low-single-digit organic net sales growth between fiscal 2027 and 2029. The company had previously targeted growth of 5% to 7% in the medium term before scrapping the forecast as spirits sales shrank from pandemic-era highs.
Diageo shares rose 7.4% as of 1150 GMT on August 6.
(Editing by Neil Unmack; Production by Oliver Taslic)
((For previous columns by the author, Reuters customers can click on CHEN/yawen.chen@thomsonreuters.com))