Good things will have to wait for Diageo – Daily Business Magazine

Johnnie Walker clock, Edinburgh: Diageo investors must give the new boss more time

New chief executive Sir Dave Lewis faces an uphill battle to fix the drinks giant, says DAN COATSWORTH

Dave Lewis is going to need a stiff drink after presenting his first set of results as the new Diageo boss. The business is not doing as well in the once lucrative North American market and China is not lining its pockets with riches either. Most of the key metrics in the results are in negative territory, with sales, operating profit and cash flow all in decline.

Shareholders have also been delivered the sucker punch of a big cut to the dividend. That might come as a surprise to many investors who thought they would be paid to wait for the business recovery. There is no point trying to dress up the six-month figures. These are awful results, and the repair job is massive.

Lewis must like a spectacular challenge, as it was clear from the day he was offered the job that it wouldn’t be easy. Fixing Diageo is like turning around an oil tanker – a very slow process.

Drastic Dave has already been handed a part-baked recovery strategy that consists of cost savings and asset sales. It’s now his job to not just fix the house but also grow it.

The Chinese operations are logical assets to offload as the region is not seen as core to Diageo and there have been reports of interested buyers. North America is much more important, with suggestions that younger people are showing greater interest in spirits than beer which in theory should give Diageo a tailwind to work its magic. Forward guidance implies that is not the case for the near term as Diageo expects further weakness in the US.

North American spirits are a highly competitive market, and Diageo’s results suggest it is losing out to rivals. A sharp decline in sales volumes is a major worry amid a cautious consumer backdrop. Drinkers might still fancy a tipple, but they’re going for cheaper options.

Even more worrying are tequila sales falling off a cliff. The drink category has waned in popularity, which is troublesome given that Diageo has historically ploughed huge sums of money to drive its tequila portfolio. Lewis could easily argue that historical investments were nothing to do with him, but he is more likely to want to offer solutions than excuses.

Thank God for Guinness. Lots of people have reached for a pint of the black stuff and it has been Diageo’s saving grace. Guinness is a bright spot in an otherwise gloomy update and means Diageo’s results aren’t a complete mess. Both the classic and non-alcoholic versions are flowing into glasses across multiple territories in Europe.

Lewis has only been in the top job for a matter of weeks and it’s too early for him to formulate a proper plan. For now, investors will have to put faith in his ability to sort things out. Dave Lewis will be under pressure to fix Diageo fast, yet he’s more likely to say, ‘good things come to those who wait’.”

Dan Coatsworth is head of markets at AJ Bell

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