Diageo investors seem braced for a beerier future

Not-so-solid Crew. Downing lots of beer after drinking spirits isn’t always the best move. On Tuesday, Diageo said sales fell year-on-year in the six months ending December as customers’ demand for the $78 billion drinks giant’s gin and whisky waned but their appetite for Guinness ticked up. The shift appears to be part of a wider trend of cash-strapped customers trading down, but it isn’t ideal for Chief Executive Debra Crew.

Diageo’s problems were well-flagged. In November, shares in the maker of Johnnie Walker whisky fell 15% after it warned that sales in Latin America and the Caribbean would decline by more than 20%. On Tuesday, Crew revealed that region had yet to hit rock bottom and that revenue could fall a further 20% in the next six months. The sharp decline in Latin America and weakness in other markets meant the Tanqueray gin maker’s overall sales fell 0.6%, missing already cautious analyst estimates for flat growth.

Crew, however, is facing bigger challenges. In every region apart from Asia Pacific, spirits sales are flat or falling. That’s a problem for a company that has embarked on a strategy of selling premium tequilas, vodkas and gins. Weaker demand for spirits appears to be caused by inflationary forces that are forcing drinkers to shift to cheaper alternatives like beer. In North America, which makes up over a third of Diageo’s revenue, spirits sales declined 3% while beer increased 6%.

This weakness will make it hard for Crew to hit her sales targets. She is hoping to deliver 5% to 7% growth over the medium term. Assume Crew can grow the $20 billion of sales the company delivered in 2023 by 6% over the next three years and can maintain an EBITDA margin of 36%. The company would then make nearly $9 billion of EBITDA in 2026. A spirits peer group including Pernod Ricard trades on just under 13 times EBITDA for that year, implying Diageo’s valuation including debt should be $112 billion. Given Crew’s group is only worth $100 billion, her investors seem sceptical that she can deliver.

Another interpretation, though, is that shareholders are starting to value Diageo more like a beer company. Anheuser-Busch InBev, the $108 billion maker of Budweiser, currently trades on just 7 times its expected 2026 EBITDA. If Diageo sells fewer $50 bottles of tequila and more $5 pints of Guinness, its EBITDA multiple for that year might deserve to be a fair bit lower than 13 times. In other words, Crew might end up hitting her growth targets, but not her valuation ones.