Despite negative organic growth, with a particularly poor performance in the US, they managed to protect their margins and publish more promising guidance than expected. The new CEO, Sir Dave Lewis, has set out his plans to streamline the business and drive growth though focus, innovation and reinvestment. 

Diageo’s restructuring is starting from the top. As it stands, only one member of their eleven-person board comes from the drinks industry. The Chairman is looking for candidates who can bring sector experience and challenge Lewis as he embarks on a turnaround. Lewis joined Diageo at the beginning of the year. He has previously held senior roles at Unilever and then became CEO of Tesco, where he landed the nickname ‘Drastic Dave’ for his ruthless approach to restructuring. His experience makes him a suitable choice for the job, and his main ambition at Diageo is to focus on doing fewer things better.

Diageo has previously been heavily brand focused. Their portfolio contains a vast number of variants, covering a huge number of names, price categories, and products across alcohol.  The last decade’s turbo drive for spirits, which culminated in lockdown binge drinking, provided a natural growth opportunity for the business. When the market for spirits began to decline, the lack of focus was a problem for Diageo. Does Smirnoff really need to come in 20 different flavours? Over 60% of Diageo’s recent growth has come from just 10 brands within specific locations (e.g. Don Julio in the US, Johnnie Walker in India). Diageo needs to turn their focus to mega brands, a theme we have seen in the wider consumer sector.

Guinness is a brilliant example of good marketing. Whilst there is an element of fashion behind Guinness’s success, a huge amount of capex and skill has been poured into the brand. Expanding the geographical reach of Guinness provides an obvious growth opportunity. Although Guinness volumes have doubled since 2018 driven by growth in the UK and Ireland, the US still accounts for two thirds of sales and has plenty of scope for progress. 

Affordability is another area for improvement. Diageo has historically excelled at premiumisation, but whilst inflationary pressures are keeping purses tight, cheaper products are a good way to recruit and retain customers. An obvious opportunity for this lies in the Ready-To-Drink (RTD) category. Compared to buying a larger bottle which customers risk disliking, RTD’s are fun, affordable and portable. Sazerac’s Buzzball is currently a clear market leader with Gen Z, but there is plenty of room for a higher quality version across all demographics. 

Whilst growth remains ambiguous until we can see tangible evidence, Diageo’s cost cutting program is more immediate. Lewis has announced that $1bn will be made in savings, a staggering $850m of which will be in job cuts. This means that Diageo can invest in the turnaround without reducing operating profit.  

Diageo have a huge scale advantage relative to a lot of their competition, but their ability to grow ahead of the market will remain a decisive factor in how easily they can shake off their hangover. 
 

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