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19 August 2026
Can fund managers really ignore where the companies they invest in are based?6 min readAuthor
Shares Magazine
Current Diageo CEO Dave Lewis is known as a specialist in corporate turnarounds and he certainly has a big job on his hands at his current employer.
Headquartered in London’s West End, the company owns several iconic brands including Johnnie Walker whisky, Smirnoff vodka and Guinness as well as Captain Morgan rum, Tanqueray premium gin and Baileys cream liqueur. As well as this enviable portfolio, Diageo has a robust distribution network and strong marketing capabilities.
Yet the shares have more than halved from 2022 highs. Hit by a combination of consumer spending pressures, inventory backlogs and shifting appetites for alcohol, accelerated by the proliferation of weight loss drugs. Debra Crew replaced Ivan Menezes after his untimely passing June 2023 but struggled to address these challenges before her departure in September last year.
The headwinds facing the business under-mined what was for some time a successful ‘premiumisation’ strategy where Diageo relied on people trading up to more expensive, high-margin spirits. Instead, people are trading down to cheaper options or reducing their intake all together.
Lewis putting his turnaround credentials to the test
Thanks to his previous success, most notably at Tesco, the appointment of Lewis in November 2025 was welcomed by the market. A decision to halve the annual dividend and a cut full-year growth forecasts in February, as he sought to give himself a steady base from which to improve Diageo’s fortunes, led to some short-term pain for the share price.
On 6 August, to a largely positive market reception, Lewis unveiled his detailed recovery strategy for the business. There were several key elements to the plan. Diageo will cut $1 billion in costs over the next three years. This will be achieved by a rehaul of the operating model and supply chain with thousands of job cuts.
Over the medium term Diageo expects to deliver low single-digit organic sales growth and mid single-digit growth in profit. Not the sort of guidance likely to generate huge excitement but if delivered consistently it could be sufficient to help rebuild the company’s credibility with the market.
This growth will be underpinned by expanding the shining star of Diageo’s business in recent years – Guinness – across the globe, investing more in affordable brands like Smirnoff and Captain Morgan and expanding in the fast-growing ‘ready-to-drink’ segment. Think pre-mixed cocktails served in a can.
This is an area where Diageo has an existing footprint through brands like Smirnoff Ice, Gordon’s Gin & Tonic and Captain Morgan and Cola but Lewis says it will now introduce canned cocktail products for all Diageo’s core spirits brands.
One risk a company trying to shift to a more mass-market appeal faces is the integrity of its premium brands being compromised. Berenberg analyst Javier Gonzalez Lastra thinks this can be avoided.
He notes: “Investment in pricing [price cuts] will remain very selective, and management emphasised on several occasions that no margin or profit rebase is required. It will not be easy, but we believe Diageo has a very clear execution plan.”
A key feature of the plan is its focus on organic growth. There may be relief that Diageo is not going to seek out acquisitions as a shortcut to reshaping its portfolio. These could provide a distraction to management and would bring integration risks.
Getting the US back on track is key
Getting the North American business back on track is significant for Diageo given it derives a hefty chunk of its revenue from this market.
Writing ahead of the strategy update, Bank of America analysts observed: “The US business can be stabilised, but probably not returned to growth. We remain cautious on the industry outlook (in the US) and therefore believe that a return to sustained growth for Diageo is unlikely.”
“That said, with sharper execution, targeted price adjustments and clearer portfolio prioritisation, we believe Diageo can improve relative performance and potentially regain share. We see a longer-term ‘new normal’ of broadly flat sales for Diageo in the US.”
While Lewis’ suggestion of a return to growth across the Atlantic could be achieved, he did acknowledge it would take two years to stabilise the business before this happened. Tequila is a key spirit for Diageo and the industry as a whole and Berenberg’s Lastra thinks there are levers Diageo can pull here.
“This category has been hit hard by changes in immigration trends in the US, diminished consumer purchasing power and increased competition in lower-priced tiers,” Lastra says: “Casamigos needed to be priced down, and that is being executed. Don Julio is rightly positioned in the ultra-premium segment. Despite the downturn, tequila continues to be the most exciting spirits category, and Diageo will try to continue to dominate.”
The numbers announced alongside the changes laid bare the challenging position Diageo is in. Net sales were down 3% to $19.6 billion and there was a 27.2% drop in reported operating profit to $3.16 billion, linked to impairment charges. This followed the recent trend of stalling revenue growth and falling profits seen since the peak years between 2022 and 2024.
A key debate for investors is whether Diageo is just suffering from a cyclical downturn or whether it faces longer-term decline thanks to a lasting shift in consumer habits driven by obesity treatments, and younger demographics drinking less.
Given that on conservative estimates, humans have been consuming alcohol for at least 13,000 years it might be premature to suggest a permanent shift away from booze on the basis of recent changes. Diageo has also shown some ability to respond to shifting trends. Its Guinness Zero brand, for example, is seeing extremely strong growth, albeit from a low base.
What about competitors and the valuation?
Major competitors to Diageo include Pernod Ricard, Jack Daniels owner Brown-Forman, Bacardi and Suntory Global Spirits. Yet the company is the undisputed global leader in premium spirits.
On a valuation basis, Diageo is at a discount to the average price to earnings ratio over the last 35 years of 16.7 times and, as the table shows, to one of these rivals.
Investors may need to decide if the 20-times plus rating the company enjoyed between 2012 and 2022 was an aberration or something it can return to if Dave Lewis delivers on his plan.
Lewis has suggested enhanced dividends and buybacks could be on the table once the company has completed some disposals and got its debt down – with some short-term spending required to deliver the restructuring programme he has outlined. Based on current forecasts the stock yields nearly 3%.
Tom Sieber: Content Editor
Tom Sieber is AJ Bell's Content Editor. He was previously the Editor of Shares Magazine. He has been with the business since 2012.
Tom is a regular contributor to the AJ Bell Money & Markets...
