John Whelan: Has 'Drastic Dave' steadied the ship at Diageo?

A new savings strategy has seen the share price rise by 7.5%

Diageo chief Dave Lewis officially opening the  Littleconnell Brewery in Newbridge in May. Picture:  Julien Behal

The global alcoholic drinks giant Diageo has suffered poor performance in recent years, particularly in the United States. Earlier this month, the maker of Guinness announced a sweeping cost-savings plan as it looks to turn results around.

The much-anticipated new strategy, expected since Dave Lewis took over as CEO at the beginning of the year, was released as part of the annual financial statement. Mr Lewis earned the nickname "Drastic Dave" because of his aggressive, rapid cost-cutting and restructuring strategies while leading Tesco. He aims to refocus the group on its leading brands, particularly Guinness. 

Diageo is understood to be planning cost savings which will result in job cuts in Ireland, with reports in June that up to 150 jobs are at risk. Nevertheless, Guinness remains the jewel in the Diageo crown, resulting in accelerated investment in Ireland to build on the growth of a brand whose success shows no sign of flagging. 

Diageo forecasts double digit growth for its Guinness brands, driven by surging international demand for both traditional Guinness and Guinness 0.0. To support this, Diageo is pushing a near €1bn overall capital investment program in Ireland through to 2029, anchored by the opening of the Little Connell Brewery in Kildare, with a further €400m expansion planned there.

The annual statement released in August focused on the Diageo group results, and its new strategy. “We expect to generate around $1bn (€869m) in savings over the next three years through initiatives spanning both the operating framework and the supply chain," it stated.

Mr Lewis was anxious to put the best spin on its 26% drop in net profits as it put the new strategy to investors. The fall in net profits was largely explained by a hefty charge taken, reflecting hyperinflation in Turkey. But annual revenue was virtually flat at $27.76bn (€24.13bn).

In addition to the negative impact of declining net profits, the company cited the impact of disposals including the sales of Guinness Ghana Breweries, Guinness Nigeria, Seychelles Breweries, as well as the Sheridan’s liqueur brand.

Mr Lewis putting his best case to investors stating his efforts will focus on "restoring (its) competitiveness in North America" and managing weakness in China in spirits categories. US spirits net sales declined by 11.5%, driven by competitive pressure and softness in the Tequila category. Tequila sales in the region were down by 21.1%.

Diageo’s main tequila brand is Casamigos, a super-premium label co-founded by actor George Clooney, and Diageo purchased in 2017 for €1bn. Return on this investment must look strained at this stage.

Nevertheless, the new strategy and the spin from company executives seems to have worked, as investors gave it the thumbs up and the share price rose by 7.5% since the annual results announcement.

Still, a clear path is yet to emerge for Diageo, given continued uncertainties, tied to changing alcohol consumption trends which are weighing on the entire sector.