Diageo’s once high-flying share price was already back at 2012 levels. Now the dividend is there too. Sir Dave Lewis has cut it in half, chopping as drastically as the market feared he would.
But that doesn’t quite explain Wednesday’s 13% fall in the shares. Rather, that was down to two factors. First, the trading numbers continued the miserable run for the entire spirits sector – Diageo edged down its full-year forecasts again. The company is getting little help from the market, especially in the US and China. Second, and more importantly, Drastic Dave was vague about what shareholders can expect in terms of hard returns once he has administered his turnaround tonic.
His diagnosis itself told investors little about Diageo that they not worked out themselves. It is hardly a revelation that the group’s spirits cabinet is overstuffed with brands, such as Don Julio and Casamigos in tequila, that sit at the top end of the price range. In the important Latin American market, for example, Lewis said the entire collection was concentrated in the top 25%-30% price bracket.
The deliberate upmarket brand construction worked beautifully in the era of gradually improving consumer incomes around the world. “Premiumisation”, or encouraging drinkers to drink more expensively, was a winner under the former boss Sir Ivan Menezes and, before him, Paul Walsh. The open question, though – the one Lewis has yet to answer – is how many price cuts Diageo will have to impose, and to how many mid-tier mass-market brands, to adapt to today’s harsher consumer climate.
The good news, of a sort, is that Diageo ought to be skilled at such “price architecture” games. Johnnie Walker’s red-to-blue whisky range is a model of how to finesse price-versus-volume tradeoffs. And a broad and deep portfolio, including Smirnoff vodka and Captain Morgan rum, ought to have the brands for the job. But until Diageo gets serious about laying out financial details of what Lewis called “the value premiumisation opportunity”, shareholders are in the dark.
Come back in late summer for a worked-up strategy, as opposed to Lewis’s high-level thoughts after seven weeks in post. For investors, though, that’s a long wait. They may happily accept that the old dividend was unsustainable and that reinvestment has to happen, but they also want to know if profit margins will be damaged by the necessary effort to regain a competitive edge.
Similarly, everybody knew Lewis would see a chance to cut costs and find efficiencies. But they were hoping for a hint at the size of the prize, as opposed to some broad musings on resetting the “operational framework” and improving the availability of Guinness, the brand that is gloriously immune to the group’s struggles in spirits.
In Lewis’s shoes, it was probably only sensible to keep it general at this stage. There is no point in offering hostages to fortune. But for outsiders it all adds to the impression that turning around Diageo could be a long job. At Tesco, where Lewis earned his spurs as a turnaround merchant, he inherited a company that was still the market leader by a mile in its domestic market, even after its accounting scandal. Diageo is a more complex and more global beast.
Still, the trading numbers, though weak, were not a disaster. Annual operating profits will either be flat or up a bit, if the latest projection is correct. And, notably, the forecast for full-year cashflow was kept intact at $3bn (£2.2bn), which was a critical piece of guidance given the $21.7bn of net debt.
But one was also left with the impression that Diageo should have started a proper self-help programme at least two years ago. Instead, the entire organisation seems to have suffered corporate shock after the sudden death of Menezes, the boardroom superstar, in June 2023. His successor Debra Crew was propelled into the job early, issued a heavy profits warning, failed to deal with post-Covid hangovers and was decrewed last year by the new chair, Sir John Manzoni, a few months after his arrival.
Now comes a reset under Lewis once he’s crunched the numbers. No doubt there is a “significant opportunity” ahead, as he says. But the opportunity would probably have been easier to grab had Diageo started sooner. You’d still bet on Lewis to succeed – but it may take longer than optimists had hoped.
