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Diageo (LSE:DGE) shares are now trading around 1,685p, a level last seen more than a decade ago and less than half their early 2022 peak. As costs are cut and the portfolio is restructured, the key issue is whether the company can make a meaningful return.
Cyclical pressures dominate
Two words sum up Diageo’s share: the falling knife. However, I continue to believe that much of the weakness in its core markets reflects a temporary post-Covid disruption, not a permanent industry shift.
Post-Covid, inventory levels increased as distributors anticipated strong demand for premium spirits when shuttering eased, only for consumption patterns to normalize faster than expected.
Local sales in bars and restaurants remain below pre-pandemic levels in many markets, a clear result of the cost of living rather than the decline in alcohol itself. Although young drinkers have embraced moderation, the decline in alcohol consumption is not a general structural change.
Over the past few years, data shows that younger drinkers are being exposed to premium drinks before previous cohorts. Ready-to-drink formats and social media-driven trends mean Gen Z is engaging with the category in a different way. That said, in my opinion the basic demand for high-quality spirits remains.
Cost behavior and the new CEO
Diageo now has Dave Lewis – nicknamed ‘Drastic Dave’ after his penchant for drastic action – as its new CEO. Dealing with how much people drink is not out of his hands, but facilitating work and directing leadership is not.
The company has more than 200 products and tens of thousands of employees. Marketing revenue has long been spread across multiple products and campaigns, often failing to drive growth in the marketplace.
Therefore, I think early wins are more likely to come from cutting distractions, clarifying priorities, and strengthening processes, rather than dramatic restructuring.
A long-term view
The question is not whether Drastic Dave can sustain the business in the short term – I have no doubt that he can. What matters is whether he can stick.
Diageo has a culture problem, and that’s no easy fix. Its purpose and values have been lost during mergers and acquisitions, and, in my opinion, the company has lost its sense of ownership.
A business like that can assemble all the chessboard pieces it wants, but it won’t renew itself over time.
An important point
More pain is inevitable for shareholders. The business still faces complexity, cultural misalignment, and the challenge of aligning a growing portfolio. These are not things that can be fixed overnight.
Perhaps the market is already overpriced for this. Investors haven’t seen a forward price-to-earnings (P/E) ratio this low – just 13 times – in more than a decade, while the 4.8% dividend yield is also eye-catching. That said, the company could reduce the payout if earnings come under more pressure.
In the end, it comes down to whether the business can get back to what it does best: making and creating great drinks. If it can regain focus and culture while navigating the current cyclical trough, today’s price will likely look like a bargain in retrospect.
I just opened a position. I think the risk-reward ratio favors long-term, patient investors, but it won’t be a smooth ride, and short-term volatility should be expected.
