Diageo launched a two-year, $1B annual savings plan at its Capital Markets Day last week, pairing sweeping cost cuts with a granular brand rescue mission targeting Crown Royal, Smirnoff, and Captain Morgan.
The world's biggest spirits company reported organic net sales for the year ending June 30 declined 2%, while adjusted operating profit rose 2%, largely on cost savings. Restructuring charges tied to the savings program will total $1.2B, delivered across 2027 and 2028.
CEO Dave Lewis, who joined last November after predecessor Debra Crew stepped down, has already become known in the City as "Drastic Dave" for his cost-cutting zeal at Tesco.
He said the turnaround plan will include significant workforce reductions across Diageo's roughly 30K employees, with $514M already booked in severance charges.
Annual pre-tax profit fell 26%, weighed down by restructuring charges and a hit from Diageo's Turkish business.
North America is the most urgent battleground. Organic sales there dropped 8.4% in the fiscal year, and Lewis said the region will take two years to return to growth.
The problems on the shelf
John O'Keeffe, CEO of Diageo North America, singled out Crown Royal, Smirnoff, and Captain Morgan as brands in long-term decline requiring fundamental fixes, and much of his remedy involves the bottle itself.
Crown Royal's premium glass bottle has been undercut by a plastic cap, and inconsistent use of its signature purple across flavor extensions has weakened shelf impact. O'Keeffe said a cohesive identity built around the iconic purple is the fix.
Smirnoff's issues are both functional and visual. Diageo removed the handle from its largest bottle, a decision O'Keeffe is reversing, and switched to recycled PET plastic that appears cloudy.
"We've got to move from recycled PET, which is cloudy and opaque, hard to see through, to virgin PET."
John O'Keeffe, Diageo North America
Captain Morgan's labels have lost vibrancy, and line extensions like canned Slice Coladas fail to clearly signal the parent brand.
Lewis also announced a $1B investment in Guinness, targeting a near-doubling of global production capacity. The FIFA World Cup helped lift ready-to-drink beverage and cocktail sales 35.1%, driven by Casamigos ready-to-serve launches and strong Bulleit and Ketel One cocktail performance.
Wall Street's read
TD Cowen raised its price target on DEO to GBP20.40 from GBP17.50, maintaining a Buy rating, and said the Capital Markets Day provided a credible roadmap for improved growth and execution.
The firm said confidence in self-help initiatives can improve fundamentals even if US spirits demand stays subdued.
DEO shares rose nearly 9% over the week following the presentation, though they remain well below the 52-week high. The stock is down nearly 13% over the past 12 months.
Diageo knows what needs fixing. The harder part is cutting $1B without giving up more ground on the shelf.
