CNBC UK Exchange: Diageo’s turnaround test

This report is from this week’s CNBC UK Exchange newsletter. Like what you see? You can subscribe here.

On Jan. 4, 2022, shares of Diageo hit an all-time high, making it the FTSE 100‘s third most valuable company, with a stock market value of nearly £90 billion (roughly $121 billion).

The world’s biggest spirits company, whose brands include Johnnie Walker scotch whisky, Smirnoff vodka, Tanqueray gin, Captain Morgan rum, Don Julio tequila and Guinness stout, has since seen its share price more than halve as its fortunes have waned.

The company enjoyed astonishing sales growth during the Covid-19 lockdowns, when households discovered the joys of cocktail-making.

But this slowed as inflation ate into disposable incomes after Russia’s invasion of Ukraine. 

There were also self-inflicted wounds, highlighted by a profit warning in November 2023, during which Diageo admitted Scotch whisky sales in Latin America and the Caribbean had slumped due to lax inventory management.

The following July, Diageo reported its first annual sales slowdown since the pandemic, while U.S. President Donald Trump‘s return to the White House in 2025 brought fresh tariff uncertainty, which forced the company to scrap a long-standing sales target.

All this cost Debra Crew her job as CEO in July last year.

Her successor, Dave Lewis, took the helm at the beginning of the year. Within weeks, he had slashed the dividend, while criticising Diageo’s “frankly very poor” service for its distributors.

But Thursday will see the noted turnaround specialist flesh out his plans in detail for the first time after an intensive few months reviewing its operations around the world.

Cost cuts look inevitable. Lewis spent three decades at Unilever, the food and household goods giant, during which he earned the nickname ‘Drastic Dave’ — which he hates — for his prowess in this area. It was also partly how he rescued Tesco, the U.K.’s leading supermarket chain, where he became chief executive in 2014 following an accounting scandal.

There may also be some disposals — again, part of Lewis’s winning formula at Tesco over six years.

He has already sold the Indian Premier League cricket team Royal Challengers Bengaluru, for £1.4 billion, while a sale of Diageo’s 63% stake in Sichuan Swellfun, a producer of China’s national spirit, baijiu, may also be on the cards. Longer term, there has been speculation — which Lewis played down in February — that Diageo’s 34% stake in the champagne and cognac business Moët Hennessy may be sold to majority shareholder LVMH.

Investors, though, care most about how Lewis can restore sales growth. Expect pricing to be a major part of the strategy. Under Ivan Menezes, Crew’s illustrious predecessor, Diageo bet heavily on so-called “premiumisation,” the notion that consumers would trade up to more expensive brands, which Lewis thinks left some potential customers in the cold.

He said at February’s interims: “There is a whole bunch of people at the moment who are not enjoying a brand from Diageo in our core categories. That, I think, is an opportunity for us.”

He pledged “very selective price repositioning” that would “be done surgically”.

Such an approach is in keeping with Lewis’s view that sales weakness in recent years has less to do than it has with younger customers not drinking or GLP-1 weight-loss drugs hitting demand for alcohol — a reason why respected investor Terry Smith sold his Diageo shares in 2024 — and more to do with weaker disposable incomes.

He has also highlighted opportunities to grow in other categories, such as ready-to-drink canned cocktails, in which Diageo was a trailblazer with products like Smirnoff Ice nearly 30 years ago.

Thriving brands like Guinness, the official beer of English soccer’s Premier League, will also receive more investment to enable it to reach more customers worldwide.

Everything in Lewis’s career to date suggests he is more than capable of achieving a turnaround.

If he does, Lewis will be thanked not only by Diageo shareholders but also by the new prime minister, Andy Burnham.

Diageo accounts for £1 in every £10 worth of U.K. food and drink exports and, as such, is a vital cog in the economy.

— Ian King

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