Diageo is currently trading at a 10-year low of $107.6, having lost nearly half its value since 2022. Investor confidence has weakened due to multiple headwinds. First, the company has experienced a sustained decline in sales across Latin America and the Caribbean, driven by excess channel inventory and a challenging consumer environment. Second, tariffs on alcohol imports into the U.S.Diageo's largest market, accounting for around 40% of its revenuepose a serious threat to top line growth and profitability. Management estimates these tariffs could slash operating profits by $200 million, with 85% of the impact tied to tequila. Third, weak consumer sentiment limits pricing flexibility, particularly in the premium and ultra-premium segments where Diageo primarily operates. Finally, the company's high financial leveragereflected in a net debt-to-EBITDA ratio of 3.1x and total debt of $20 billionraises red flags. Despite declining profitability, Diageo continues to prioritize dividends and share buybacks over debt reduction, prompting concerns about its capital allocation strategy.
Diageo is one of the world's leading players in the alcoholic beverage industry, with a portfolio of over 200 brands spanning spirits and beer. Its product range includes Scotch whisky, gin, vodka, rum, tequila, ready-to-drink beverages, and beer, sold under globally recognized names such as Johnnie Walker, Crown Royal, Smirnoff, Ciroc, Ketel One, Captain Morgan, Baileys, Don Julio, Casamigos, Tanqueray, and Guinness. These brands are distributed in nearly 180 countries, showcasing the company's vast global reach. Diageo generates roughly 40% of its revenue from North America, followed by 24% from Europe, 20% from the Asia-Pacific region, and 16% from the Rest of the World. Scotch, beer, tequila, vodka, and Canadian whisky make up a significant portion of its revenue. Notably, Johnnie Walker accounts for over one-third of global Scotch sales and contributes nearly 25% to Diageo's total net sales. In the tequila segment, Don Julio and Casamigos lead the category and are the fastest-growing brands in Diageo's spirits portfolio.
Diageo: Has the Stock Bottomed Out?
Diageo's Investor Presentation
How Did Diageo Perform in the First Half of FY 2025?
Diageo reports on a semiannual basis, with its fiscal year ending in June. In 2024, net revenue declined largely due to macroeconomic headwinds. Seasonality also plays a role, as the company's fiscal first half aligns with the holiday-heavy calendar second halftypically a period of stronger alcohol consumption. In 1H FY2025, net sales came in at $10.9 billion, down 0.6% YoY, primarily due to adverse foreign exchange movements. On an organic basis, net sales rose by 1.0%, driven by a 1.2 percentage point increase from pricing, while volumes declined by 0.2%. This suggests that topline growth is being driven by price hikes, not volume gainsindicating weak consumer demand elasticity.
On a regional basis, performance was mixed:
North America saw a modest return to organic net sales growth, marking sequential improvement from prior periods.
Europe delivered a relatively resilient performance, led by Guinness, despite ongoing macroeconomic pressures.
Asia Pacific underperformed due to weakness in Greater China and difficult comparisons with prior-year inventory replenishment in Shui Jing Fang.
Latin America & the Caribbean is returning to growth as destocking nears completion and consumer sentiment stabilizes in key markets like Brazil and Mexico.
Africa continued to post strong organic growth, although macroeconomic volatility remains a challenge.Operating margins remain under pressure, with a 132 bps decline. Organic operating profit fell 1.2% in 1H FY2025, affected by higher staff costs, reinstated incentives (classified as one-offs), and continued strategic investmentsespecially in digital capabilities and U.S. route-to-market initiatives. EBIT and net profit margins declined accordingly. EPS dropped 11.7% YoY, while pre-exceptional EPS declined ~10% to $0.977. This was driven by weaker margins, foreign exchange headwinds, and a softer contribution from Moet Hennessy, where Diageo holds a non-controlling interest.
Is Diageo's Growth Prospect Under Pressure?
While net revenue has grown marginally, its not keeping pace with inflation. In 2024, inflation in the U.S. and Europetwo of Diageo's largest marketshovered around 3% and 2.5%, respectively. This means Diageo is effectively shrinking in real terms. Although management highlights foreign exchange as a key factor, the more fundamental issue appears to be pricing power. Organic revenue growth is lagging inflation, and volumes are flat or declining, pointing to difficulty in passing cost increases to consumers.
A key emerging risk is the impact of tariffs, particularly on products subject to geographic origin rules. Approximately 45% of Diageo's U.S. net sales come from items that must be produced in Mexico or Canadamost notably tequila and Canadian whisky. If enacted, these tariffs would affect input costs rather than retail prices, further compressing margins. While management claims they can mitigate the impact, this remains a notable downside risk given the current margin squeeze.
Beyond short-term headwinds, structural issues in the spirits industry are becoming harder to ignore. Changing consumption patternsespecially among Gen Zshow a clear shift toward moderation, preference for ready-to-drink (RTD) formats, and growing interest in cannabis or GLP-1-related wellness products. According to a survey by Attest, 21.5% of Gen Z abstain from alcohol, and 39% drink only occasionally. These trends stem from both health concerns and affordability.
While Diageo views these as cyclical, I see them as more structural. RTDs often act as direct substitutes, and while cannabis hasn't yet significantly impacted spirits demand, it competes for consumer wallet share. In the most recent earnings call, management withdrew its medium-term guidance, citing prevailing challenges. This signals that near-term financial performance may remain under pressure across the next few reporting periods. Diageo has strategically expanded its presence in the non-alcoholic beverage sector, aligning with evolving consumer preferences for moderation and wellness. Under CEO Debra Crew's leadership, the company has identified the no- and low-alcohol category as a significant growth opportunity. This is evident in its acquisition of Ritual Zero Proof in September 2024, a leading U.S. non-alcoholic spirits brand offering alternatives to whiskey, tequila, gin, rum, and aperitifs. This move complements Diageo's earlier investment in Seedlip, acquired in 2019, further solidifying its leadership in the non-alcoholic spirits market. These brands, along with alcohol-free versions of Gordon's, Tanqueray, and Captain Morgan, have contributed to a 56% increase in Diageo's non-alcoholic portfolio.
The company has also invested in expanding production capabilities to meet growing demand. In July 2024, Diageo announced a 25 million investment to boost production capacity for Guinness 0.0 at its St. James's Gate facility in Dublin, aiming to increase output by 300%. Guinness 0.0 has gained significant traction, accounting for nearly 3% of Guinness's global volume .
Additionally, Diageo's Indian subsidiary, United Spirits, acquired a 15% stake in V9 Beverages, a New Delhi-based non-alcoholic drinks company producing Sober Gin, Sober Whiskey, and Sober Rum, marking its entry into India's emerging non-alcoholic spirits market. Diageo's commitment to the non-alcoholic segment is part of its broader "Spirit of Progress" ESG strategy, focusing on promoting positive drinking behaviors and offering consumers a range of choices to moderate their alcohol intake.
Investor Confidence Shows Strain
Several prominent gurus have recently trimmed their holdings in Diageo, reflecting a cautious stance amid evolving market conditions. As of March 31, 2025, value investor Mario Gabelli (Trades, Portfolio) reduced his stake in the company by 4.75%. Other well-known asset managers followed suitFirst Eagle Investment (Trades, Portfolio) sold down 7.44% of its position, while Ken Fisher (Trades, Portfolio) significantly cut his exposure by 93.94%. Dodge & Cox and Tweedy Browne (Trades, Portfolio) also made modest reductions of 2.32% and 1.61%, respectively. These portfolio adjustments may signal a reassessment of Diageo's near-term prospects and broader portfolio rebalancing strategies.
Further Downside Possible Despite Discount
Diageo's P/E ratio has dropped from 40x in 2021 to 16.6x today due to sustained headwinds. The stock trades at a 28% discount to its five-year average forward P/E of 23.02x. Despite this decline, Diageo still trades at a premium to consumer staple peers such as Shepherd Neame Limited and The Artisanal Spirits Company, which are valued at 13.5x and 9.3x forward earnings, respectively.
I believe further downside is possible, as Diageo faces a complex operating environment marked by FX volatility, inflation, tariff threats, and evolving consumer preferences. Investors should remain cautious, as Diageo's declining sales in key regions like Latin America and Asia, coupled with persistent margin pressures, could delay any meaningful recovery. Additionally, its elevated debt levels and limited pricing flexibility may continue to constrain earnings growth in the near term.
While its global brand strength and some regional resilience offer stability, key metricslike real revenue growth, shrinking EPS, and stagnant volumessuggest deeper issues than a typical cyclical slowdown. The company's ability to restore pricing power and adapt to structural shifts in demand will be crucial in the coming quarters. Until clearer signs of recovery emerge, it's prudent to keep Diageo on the watchlist and closely monitor how these dynamics unfold.
