Diageo, the Johnnie Walker to Guinness group, has suffered a series of setbacks that may suggest it is now paying the price for its ‘premiumisation’ strategy.
Chief executive Debra Crew paid the price as a series of setbacks accompanied changes in drinking habits, particularly among the young who drink less alcohol.
Rising prices have contributed to consumers trading down to cheaper brands while a return to the office has seen consumption fall.
In May Diageo said it would take a $150m hit from US President Donald Trump’s tariffs and has instigated a $500 million programme of cutbacks.
In terms of share price performance Diageo is the third-worst performer so far this year, with a fall of nearly a quarter, standing no higher now than it did in 2016. They fell by more than 40% under Ms Crew’s tenure, which began in June 2023 on the death of Ivan Menezes.
Tuesday’s figures will be presented by chief financial officer Nik Jhangiani, who is also interim chief executive and tipped to get the job full-time.
For 2025, analysts at AJ Bell expect 1.4% organic sales growth and a headline revenue number of $20.2 billion, flat on last year. Management say adjusted operating profit will show a slight drop, similar to the 1% rate of decline seen in the first half.
On a reported basis, analysts expect $5.7bn for 2025, compared to $6bn last year, rising to $5.9bn for 2026, when management has previously stated operating profit would rise faster than sales.
The dividend is expected to creep higher to $1.037 from $1.0348 a year ago, but in sterling terms that is likely to equate to a drop, owing to sterling’s gains against the US dollar.
Diageo owns 30 Scotch distilleries — including well-known brands such as Lagavulin, Oban and Talisker – and other drinks brands such as Smirnoff vodka, Gordon’s gin and Captain Morgan rum.
However, alcohol consumption is declining across much of the western world, particularly among the younger generation, creating a clear threat to the long term growth of the drinks companies.
Good news is that Guinness sales have been rising, particularly in the UK and Europe, helping to offset declines in some key spirits categories, such as vodka.
AJ Bell analysts say that a switch to cheaper brands may mean that “Diageo is now paying the price for its prior ‘premiumisation’ strategy and witnessing a return to more normal drinking patterns as lockdowns fade into the memory and more workers return to the office.”
Diageo’s own data contradicts the negative sentiment towards higher value products. Julie Bramham, the head of its luxury group, said that while young people are drinking less than their parents, they are “drinking better” — and are prepared to spend more money on each tipple.
“It’s a real premiumisation opportunity,” she insists, adding that its data suggests drinking among the young favours premium spirits.
Despite the downbeat mood, consensus analyst forecasts predict a share price of 2,445p within a year. That would be a staggering 35% jump from the current price.
BP second-quarter results
Another company whose shares have underperformed the market is energy giant BP, trading no higher than in 1997.
AJ Bell says management should hardly be surprised that an activist investor such as Elliott has been pressing for change which is now in process with a refocus on oil and gas and a change of chairman.
The headline number to note will be replacement cost pre-tax profit, where the consensus analysts’ forecast is $4.6bn, an improvement on the first-quarter’s $4.2bn and the $2.6bn outturn in the same three-month period last year.
“One of Elliott’s major areas of concern seems to be cash flow, especially as net debt is starting to rise again,” says AJ Bell. “BP is paying out healthy dividends and buying back stock, but the cash flow is not necessarily there to support such largesse.”
Bank of England rate-setters meet
The market is expecting the Bank of England to cut the interest ratel to 4% from 4.25%, the fifth cut by the Bank’s monetary policy committee (MPC) since it began reducing rates in August 2024.
A cut is seen as most likely, despite inflation rising to 3.6%, almost twice the target rate. It stood at 2% when its rate-cutting exercise kicked in last year.
While there is no sign of recession, the economy has been sluggish and the MPC will see a need to deliver some help after the pain of April’s tax and wage rises.
Business surveys have not been entirely helpful with contradictory assessments of the outlook and the level of confidence. There is, however, a growing demand for more help for the SME community, particularly those in hospitality and retail.
DIARY
Tuesday 5 August
- Full-year results from Diageo
- First-half results from BP, Capita, Domino’s Pizza, Serica Energy, Smith & Nephew, Travis Perkins,
- UK purchasing managers’ indices (PMIs) for services industries
Wednesday 6 August
- First-half results from Glencore, Legal & General
- Purchasing managers’ index (PMI) for the UK construction industry
Thursday 7 August
- First-half results from Deliveroo, InterContinental Hotels, Harbour Energy, Serco,
- Bank of England interest rate decision
- Halifax UK house price index
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