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January is when millions of western drinkers forgo alcohol for a month. But investors’ abstinence from European spirits companies has lasted for years. Half-year results from Diageo on Tuesday will do nothing to persuade them to break their sobriety.
Shares in Diageo and France’s Pernod Ricard have lost 26 and 34 per cent in the past five years, as the warm feeling of the pandemic-era sales boom has worn off. Rather than reinjecting some momentum, as investors had hoped, Diageo’s results highlighted how difficult the industry is.
Granted, the threat of US tariffs on spirits imported from Canada and Mexico is an extra sour ingredient, even if US President Donald Trump on Monday gave Mexico and Canada a 30-day reprieve.
About 45 per cent of Diageo’s US net sales are driven by products that originate from Mexico, such as tequila, and Canada, where Crown Royal whisky originates. Should tariffs go ahead, they could shave around 3.5 per cent off Diageo’s global operating profits, reckons Bernstein’s Trevor Stirling, although that is before any actions Diageo believes it can take to soften the blow.
On the plus side, the US tariff uncertainty gave Diageo chief executive Debra Crew useful cover to finally abandon a 5-7 per cent medium-term organic sales growth target, set in 2021. Even before President Trump’s return to the White House, few believed it remained achievable. Maintaining it for so long had led to “unrealistic” expectations on the part of investors and “suboptimal” management decisions, reckons James Edwardes Jones of RBC Capital Markets.
Instead, Crew has promised to give investors more regular “near-term” guidance. While necessary, the target’s abandonment points to the fundamental problem afflicting the spirits market: there is very little clarity on what shape this industry might take.
After all, trade wars — which also include Chinese duties on EU brandy — are only the latest issue. Investors fear problems in the US market — where Diageo’s sales were flat in the first half — may be structural rather than cyclical. In many western countries a good proportion of younger people are shunning alcohol. Sales in Asia continue to suffer from economic weakness in China.
Diageo is rightly concentrating on what it can control, such as further efficiencies. Crew says she remains confident “of favourable industry fundamentals”. But until there is clearer evidence to back up her optimism, she will struggle to persuade the market to once again raise a glass.
nathalie.thomas@ft.com
