Diageo Stock Plunges After Half-Year Report Disclosure; New CEO's Debut Makes Clear Assets Won't Be Sold Off Cheaply

21st Century Business Herald Reporter Xiao Xia

Diageo has made a decision that will bring short-term pain.

On February 25, Beijing time, the spirits giant Diageo announced its mid-year results for fiscal 2026: revenue of $10.46 billion in the first half of the fiscal year, with an operating profit of $3.116 billion, both down 2.8% organically year-over-year.

“The performance in the first half of fiscal 2026 is mixed,” said Dave Lewis, the new CEO of Diageo, making his first appearance at the earnings call, less than two months after officially taking office on January 1 this year.

A review of the financial report by 21st Century Business Herald noted that in the first half of fiscal 2026 (i.e., the second half of 2025), Diageo performed strongly in Europe, Latin America, and Africa, but faced cooling demand in the two key markets of the U.S. and China, offsetting growth in other regions.

As a result, Diageo lowered its full-year guidance for fiscal 2026 again, adjusting organic net sales growth from “flat to slight decline” to “down 2% to 3%,” and organic operating profit growth from “low single digits” to “flat to low single digits.” Diageo had already revised down its full-year outlook when releasing its Q1 results.

Meanwhile, the board announced that the interim dividend for this fiscal year will be halved from 40.5 cents per share to 20 cents per share.

This major decision to lower guidance and cut dividends triggered a strong market reaction, with Diageo’s stock plunging 15% on the 25th, dragging down the entire spirits sector, with peers like Pernod Ricard, Remy Cointreau, and Kimball also seeing their stock prices decline.

(Diageo’s stock plummeted after mid-year results disclosure)

However, the new CEO sees this as a necessary short-term tough decision to seize future opportunities.

“I’ve been in the role for just a few weeks, and I see many significant opportunities for Diageo. To capitalize on these, we need to enhance financial flexibility. The board has decided to lower dividends to a more reasonable level to accelerate balance sheet repair,” said Dave Lewis. “We believe this move is right and will ensure Diageo maintains its position as a global leader in spirits and creates higher value for shareholders in the coming years.”

Diageo stated that under Dave Lewis’s leadership, the management team is continuously evaluating global operations. He will present the next phase of Diageo’s strategic plan to the board in Q2 and will disclose it to the market in Q3.

Additionally, during the Q&A session, an institution asked about rumors of further asset sales, such as Shui Jing Fang (600779). Dave Lewis declined to comment specifically but emphasized that Diageo will not sell any brands below their fair value.

New CEO’s Response to Spirits Decline: Consumer Finances Under Pressure

At the mid-year earnings call on February 25, Dave Lewis revealed that over the past seven weeks, he has traveled extensively across markets in the U.S., Latin America, Europe, the Middle East, and India.

Previously, 21st Century Business Herald reported that Dave Lewis had previously rescued Unilever UK and Tesco during crises, earning the nickname “Iron Fist Dave.”

Now, transitioning to the spirits industry, how does Dave Lewis view Diageo’s current situation? How does he plan to turn things around?

In his first public dialogue with the market, the new CEO expressed strong confidence in the spirits business.

“Spirits is a very stable industry,” Dave Lewis told investors.

Long-term, he cited data: from 2010 to 2024, global spirits sales grew by 20%, and the value of global spirits (excluding Baijiu) doubled.

In the spirits sector, in terms of categories, sales, and market coverage, Diageo is undoubtedly the world’s leading spirits group, with over 80% of its revenue coming from spirits and pre-mixed drinks, positioning it at the core of the spirits market.

Data from Dave Lewis shows that in 2024, Diageo’s share of the global spirits industry (including Baijiu and pre-mixed drinks) was 9.6%, and its market share in international spirits has mostly hovered around 16% over the past fifteen years.

High-end spirits, in particular, perform relatively better during downturns. In fiscal 2025, in the U.S. spirits market, Diageo held a 22% share in the $50+ price segment, 7 points above the market average. In the tequila category, where Diageo has a strong position, it held a 53% share in the $50+ segment, significantly ahead.

In the short term, spirits consumption remains resilient.

According to surveys in the U.S., UK, India, and Mexico, consumer attitudes toward spirits have not fundamentally changed over the past year.

If so, how to interpret Diageo’s decline in both the U.S. and China?

In the first half of the fiscal year, Diageo’s net sales in the Asia-Pacific region organically declined by 11%, and in North America by 6.8%, while other regions saw growth. The most significant declines were in the U.S. and China, even affecting the previously booming tequila category.

Market analyses attribute the global decline in spirits consumption to factors such as inflation reducing consumer purchasing power, a trend toward rational drinking, the popularity of GLP-1 weight-loss drugs (like semaglutide) reducing alcohol desire, and other addictive substitutes.

What is the core factor affecting spirits consumption?

Since taking office, the CEO has visited multiple countries and shared his view: based on the situations in the U.S. and UK markets, economic pressures have significantly impacted consumers’ disposable income, making purchasing power the most prominent challenge.

He explained that compared to five years ago, U.S. households spend 25% more on fast-moving consumer goods (excluding alcohol), but buy 8% fewer items. In the UK, household spending on essentials like housing, utilities, transportation, and food and beverages has increased significantly compared to two years ago, while alcohol expenditure remains nearly unchanged.

Other factors, in his view, have less impact.

In summary, the new CEO believes that the long-term outlook for spirits remains positive. Diageo’s global market share is stable, especially in core markets and premium categories, where spirits consumption sentiment has not changed dramatically. The only issue is that consumers’ wallets are shrinking—they are spending only on essentials like food, clothing, housing, and transportation, leaving less money for alcohol.

Clear Priorities: Asset Sales Will Not Be Undervalued

How does Diageo plan to respond to changes in consumer behavior?

On the 25th, during the earnings call, Dave Lewis outlined the company’s three current priorities.

First, to develop a competitive category strategy that aligns with market-leading brands.

Specifically, he emphasized continued investment in high-end categories.

For example, Guinness is a potential global brand with huge growth potential. Its share in the ultra-premium beer market is still less than 5%, leaving room for regional expansion.

He also mentioned exploring new product opportunities, including repositioning pricing and creating new value propositions.

He believes Diageo has underinvested in the affordable spirits segment and is considering price reductions for some brands, which is closely related to the current decline in consumer purchasing power.

In the Middle East and North Africa, he cited Diageo’s whisky portfolio, which is being repositioned from mid-to-high price points toward both ends, seeking high-end value opportunities to improve competitiveness.

Besides price cuts, another approach is to promote smaller packaging options, with plans to further optimize pricing and packaging structures. Many of Diageo’s brands in China and other markets have been pushing small-sized products in recent years.

The second priority is customer-centricity.

Dave Lewis believes that revitalizing and focusing on the on-trade channels is essential, as is improving service levels in off-trade channels. He mentioned that feedback from former Tesco employees indicated that Diageo’s customer service investments in some areas are insufficient and need attention.

Third, he aims to restructure Diageo’s operational system to deliver sustainable returns.

There have been reports before the earnings call that the new CEO will push for a comprehensive overhaul of Diageo’s structure, including executive committee personnel adjustments, reducing management layers, and changing the complacent internal culture.

These measures aim to improve execution, accelerate decision-making, and reduce costs.

Given the CEO’s past management style, the market is speculating whether Diageo will significantly sell assets to reduce debt and enhance shareholder returns.

In response, Dave Lewis stated, “If appropriate, we will dispose of assets, but we will never sell brands below their value.”

During the call, Diageo mentioned the sale of its East African beer business to Asahi Group in December last year, a deal worth over $2 billion expected to close in the second half of fiscal 2026.

As for the Chinese market, Dave Lewis did not provide specific details.

When asked about potential asset sales in India and China, he clearly declined to comment on market speculation and emphasized that Diageo has no intention of selling any brands below their value.

Diageo CFO Nik Jhangiani added, “Regarding Shui Jing Fang (the rumored sale), I want to clarify: we have never discussed this; it’s just market speculation, so we will not comment further.”

However, Dave Lewis also mentioned that if a third party approaches with an irresistible offer outside of Diageo’s strategic plans, the company would listen and communicate as a rational operator.

Currently, the future of the Chinese market and how to handle assets there will depend on the new CEO’s in-depth assessment and overall strategic direction. According to Dave Lewis, after the half-year report, he plans to visit markets in Asia and Africa.