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Dueling narratives on display for Diageo’s US beer and spirits bizzes in its fiscal first half for 6 mos thru Dec 31. Core US spirits weighed heavy on results, with organic oper profit -11%, net sales down 9% and volume off 7% amid “increased competitive pressure and further category softness, particularly in tequila,” co noted. On flip side, Diageo Beer Co continued to outpace all other top US beer suppliers. Organic net sales grew 7.3% with volume up 5.5%. Trends slowed for both units following fiscal Q1 (Jul-Sep) in which DBCo USA net sales jumped 9% and US spirits fell 4%. But beer still a standout for world’s largest distiller in its biggest mkt, “driven by double digit growth” for Guinness and Smirnoff Ice up mid singles in H1. Across North America (mostly US), Guinness grew “more than 15%” and “gained share every week,” said new ceo Sir Dave Lewis on earnings call, making his public debut just 7 wks into role. Soft US spirits sales were the primary driver of co’s 2d guidance cut in as many qtrs. Full fiscal yr forecast thru Jun now calls for global organic net sales down 2-3% (previously flat to slightly down) and organic oper profit flat to up low singles (previously low- to mid-single-digit growth). US malaise also played into board’s decision to slash Diageo’s dividend to help fund turnaround initiatives. The North American market “is challenged,” Dave acknowledged. “Our portfolio needs some time and investment to make it more competitive. At the same time, we need to invest in our business, specifically Guinness’ capacity and capability investment.” Prospect of Select “Price Repositioning” Stokes Price-War Anxieties Pressure on consumer wallets is “far and away” the biggest challenge impacting the category, commented Dave, whose propensity for cost-cutting earned him the nickname “Drastic Dave” in previous gigs. And tho he didn’t yet unveil a full-fledged strategy, Dave’s “immediate priorities” pointed to possibility of select “price repositioning” alongside activating or introducing brands at price points Diageo previously ignored. Also among priorities for the former retail ceo: improving Diageo’s “very poor” customer service, with over 60% of all orders entered manually, and redesigning co’s operating framework. Stock sank 14% on day of earnings as investors took down a complex tonic. But “the market is clearly worried that the cure is worse than the disease,” wrote Bernstein’s Trevor Stirling, highlighting heightened anxieties about “a potential broad-based price-war.” Premiumization “Was a Fantastic Strategy,” but “Significantly Under-Represented” in Mass Mkt Price cuts would be done “surgically” on basis of individual brands, pks, mkts and channels, Dave assured, while continuing to invest in premium and sharpening price pk architecture. But they’d likely create “downward pressure” on margins, he acknowledged, ideally offset by increased volumes and gross profit. Diageo’s decades-long premiumization “was a fantastic strategy,” Dave reflected. But it’s “significantly under-represented” in the mass mkt, something he views as “both a challenge and indeed an opportunity.” He also pointed to oppys in RTDs and smaller pk sizes, both of which continue to grow. There’s a “very significant and profitable opportunity for Diageo in RTDs,” Dave highlighted, noting that half the segment’s “$8 billion of growth between 2021 and 2024” came from higher-ABV products. “We see a big shift in perspective,” noted Trevor, “thinking about the category as a whole instead of just the (premium) brands.” But “we expect price skirmishes” rather than a spirits pricing “Armageddon.” Will downward pressure on distilled spirits prices affect beer? Previously the Growth Driver, Diageo’s US Tequila Sales Tanked Amid Trade Down Diageo’s sudden softness in tequila was by far the biggest catalyst for its US struggles. Co’s total US tequila sales dropped 23%, driven by Don Julio down 21% and Casamigos -31%. That’s lapping “strong growth in the prior period,” tho Diageo also pointed to “increased competitive intensity” and “weakness in the top end of the category in the US as consumers downtraded.” Notably, DISCUS cited “no evidence” of trade down during its annual presentation earlier this mo. But the biggest distiller would seemingly beg to differ. Global Sales and Profit Down 2.8% Organically, Volume -1% North America still accounted for 36% of Diageo’s net sales in fiscal H1, by far its biggest region. Reported North America net sales dropped 7.4% to $3.8 bil for fiscal H1. But global trends were better with net sales down 4% to $10.5 bil. Organic sales and oper profit both dropped 2.8% with volume off just 0.9%. Mktg investment declined 10.2% to a reported $1.7 bil, still a robust 16.3% of sales. Meanwhile, co continues to forecast ~$200 mil in annualized tariff impact for now, which it expects to mitigate by about half. Guinness Strong Globally Too; Up 11% in H1, Double Digits for 5 Yrs Running Organic net sales for global Guinness jumped 10.9% in fiscal H1, now up double-digits in each of last 5 yrs, co showed. It is “growing very strongly everywhere” and now accounts for roughly 15% of Diageo’s total sales, Dave indicated, reiterating that geographic and capacity constraints are issues “we need to address and quickly.” Net sales of co’s NA portfolio also grew ~14% organically in fiscal H1, “led by Guinness 0.0 in Great Britain, Ireland and the US.”

Diageo’s Beer Biz Shines as US Spirits Stumble; “Drastic Dave” Makes Debut

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