Usually I take it on the chin when one of my portfolio holdings takes a hit, but it’s a different story with the Diageo (LSE: DGE) share price. Something about it makes me feel uneasy.
I bought the FTSE 100 spirits giant in January last year, a couple of months after its first profit warning in November 2023. That was triggered by falling sales in its Latin American and Caribbean markets, as cash-strapped drinkers traded down from Diageo’s premium bands to cheaper local rivals. Inventory blunders didn’t help.
I decided that was a one-off, and the board would quickly turn things round. But over the last 12 months, Diageo shares have fallen another 20%. They’re down by a third over two years.
Is this FTSE 100 stock in serious decline?
This feeds a worry that struck me shortly after buying Diageo. I was reading a newspaper article about the rising popularity of weight loss drugs like Ozempic, which are known to curb appetite.
The journalist pointed out that many users had also gone off booze. In fact, they touted weight loss drugs as a potential treatment for alcoholics. Even if they’re not used for that, Diageo may still have a problem. The market for Ozempic and the like is huge. Diageo will struggle if millions lose their appetite for alcohol as a by-product.
Throw in reports showing Gen Z’s cutting back on drink, and I felt my shares faced a double whammy. Of course, this could just be Gen Z reacting against their boozy parents. Kids do that. If they react against their own parents’ sobriety, we might end up at square one. But it’s a danger.
Can Diageo crack low-alcohol spirits? I don’t think that will be easy. Competition will be fierce. Plus it loses its hard-won brand advantages.
The last thing Diageo needed was a trade war too. President Trump imposing 25% tariffs on imports from Mexico and Canada poses a significant threat to premium tequila brands like Don Julio and Casamigos, and well as Canadian whisky label Crown Royal. Tariffs could potentially slash operating profits by up to $200m.
A bumpy long-term hold
A trade war also threatens to disrupt supply chains and inflate costs at a time when customers may struggle to swallow price hikes. Diageo’s responded by scrapping its medium-term sales growth target of 5-7%, and switching to more regular near-term guidance.
Tuesday’s (4 February) interim results were mixed. Reported net sales dipped by 0.6% to $10.9bn. That was mostly due to unfavourable exchange rates though. Organic net sales actually grew 1%.
Operating profits fell 4.9% as margins were squeezed. North America’s showing some sparkle, but Latin America remains a drag. At least Guinness is flying.
I’m telling myself it’s normal to have doubts when a stock heads south. If the economy picks up, the Diageo share price may follow. Trump may be bluffing. Gen Z looks like it needs a drink. So for now, I’m holding. But I can’t shake that queasy feeling.
