Diageo is under pressure to set a new course as investors grow weary of languishing sales amid wider falling demand for alcohol.
All eyes will be on chief executive Debra Crew and chief financial officer Nik Jhangiani on Tuesday, when the FTSE 100 spirits giant will unveil its half-year results. Investors have called on the pair to give a clearer indication of Diageo’s growth prospects and set out a plan to tighten up costs and reduce leverage.
There are signs that shareholders are starting to lose patience.
“Investors need a clear message about what to expect in terms of future growth,” said Kai Lehmann, a senior analyst at Flossbach von Storch, a top-20 investor in Diageo. “The current 5 to 7 per cent medium-term organic sales growth target seems unrealistic.”
The results will be published days after Diageo’s share price soared to the top of the FTSE 100, prompted by reports that the company was considering a sale of its blockbuster brand Guinness, or its 34 per cent stake in LVMH’s drinks business, Moët Hennessy.
Despite a swift denial by Diageo last Sunday — and its subsequent confirmation of the $81mn sale of its Guinness breweries business in Ghana — the uptick was a sign that investors are open to some kind of shake-up.
The London-listed group, whose brands including Johnnie Walker, Smirnoff and Don Julio make up about 4 per cent of global alcohol sales, is expected to cut its medium-term sales guidance to reflect a more realistic picture as demand falters in Diageo’s crucial US market.
Growth in the wider industry has stagnated as drinkers cut back on alcohol, following an unprecedented boom during Covid-19 and the ensuing recovery, when consumers spent their savings on pricey cocktails. The hangover has hammered spirits stocks, which are now trading at a significant discount to the wider consumer category. Share prices were not helped by the US surgeon-general saying in January that alcoholic drinks should carry a warning to boost awareness about their link to cancer.
Some investors feel that Diageo has insisted for too long that the downturn is temporary, promising a recovery that has failed to materialise. The rise of weight-loss drugs — which may also be able to reduce alcohol consumption — and a growing trend for moderation has also caused jitters. Veteran investment manager Terry Smith dumped his fund’s stake in Diageo earlier this year over such concerns.
Diageo shareholder Chris Rossbach, managing partner at J Stern & Co, a private investment office, said he wanted management to “articulate the investment case more clearly”, and to focus on finding efficiencies in the business.
Tuesday will be the first trading update since Jhangiani joined from Coca-Cola bottler CCEP, and since the appointment of the new chair, former civil servant and BP executive Sir John Manzoni. Shareholders and analysts say the new team offers an opportunity to reset the narrative.
“We still have to see [Crew] fully realise the potential of the portfolio . . . she must take the initiative, reinvest and go on the offensive,” Rossbach said, adding, “we want to see more focus on costs and efficiencies”.
Crew became CEO in the summer of 2023, following the death of Sir Ivan Menezes, who had led Diageo for a decade. Crew, who previously spent a stint as the group’s head of North America, has faced investor scepticism since she was forced to issue a shock profit warning following a sales slump in Latin America. Lavanya Chandrashekar, her CFO, stepped down not long after. The company has also recently appointed a new head of investor relations.
At its last trading update, the spirits maker reported its first global drop in sales since 2020, sending the shares down more than 9 per cent in early trading. Global sales in the 12 months to the end of June fell 1.4 per cent to $20.3bn.
Flossbach von Storch’s Lehmann said he hoped the management team would provide “fresh ideas” about how to strengthen the growth profile. “We miss the sense of urgency with regards to the rising interest burden, as we would prefer the balance sheet to be less leveraged,” he added.
Diageo has accumulated growing levels of debts, amounting to $20bn net on its balance sheet, raising concerns among investors that the burden will dampen profits. Its target leverage ratio is 2.5 to 3 times net debt-to-ebitda. The ratio at the end of Diageo’s 2024 financial year was 3 times.
Jhangani in his previous role at CCEP was very focused on shareholder returns, and popular with investors as a result. Jefferies analyst Ed Mundy said they would be looking for him both to set out a plan to cut costs, as well as some reassurance on returns. “People want to see the dividend continuing to grow,” he said.
While it is Guinness that has captured recent headlines, several shareholders told the Financial Times that they were not looking for Diageo to sell the famous stout. The drink enjoyed unprecedented demand in the run-up to Christmas, causing some pubs to run dry and pouring criticism on Diageo for not foreseeing the supply squeeze.
Rossbach at Stern said that “while it’s always good to think about portfolio restructuring”, Guinness was “an irreplaceable brand . . . it’s not clear that the premium they’d get is better than what they can achieve themselves”.
A top-20 shareholder agreed that Diageo should “definitely keep” Guinness.
Diageo has been steadily offloading underperforming brands, including Venezuelan rum Pampero and Dutch liqueur Safari. Luxury vodka brand Cîroc is also reported to be on the chopping block. The brand’s commercial association with the rapper Sean Combs came to an end last year, months before he was charged with sex trafficking. He denies the allegations.
One adviser close to the company said further sales could be under consideration and that Diageo was constantly reviewing its portfolio.
“It depends on how aggressively they want to deleverage,” he said, adding that the company could “grow into their debt”, or if they were more cautious, consider selling something larger that is not a natural fit in the portfolio, such as its African beer business, Kenya-based East African Breweries.
Diageo has already sold off its other African beer subsidiaries, in a shift to an “asset light” model in which it retains ownership of its brands, but sells its brewery operations and distribution to local operating partners, not unlike the Coca-Cola bottling system.
Analysts expect Diageo to report 0.4 per cent organic sales growth in the six months to December, and a 2.2 per cent decline in operating profit. Its operating margin is expected to fall 79 basis points.
“The bottom line is that we have had a bit of a boom and bust in spirits, and we are now trying to clean up the base,” said JPMorgan analyst Celine Pannuti. “It could be massive to acknowledge this and then take the market through that new narrative.”
