The Diageo (LSE: DGE) share price has taken a hammering over the past few years, hit by changing drinking habits and slowing global demand. But I think this FTSE 100 giant, which has some of the world’s strongest premium brands and a reinvigorated strategy, could be quietly setting up for a powerful recovery.
Strategy reset
In an attempt to arrest its falling share price, Diageo has instigated a new strategy, codenamed ‘Accelerate’. Several strands make up this programme. A key one is operating model redesign.
The company has a strong entrepreneurial mindset and different regions are given autonomy on how they spend their marketing budget.
However, such autonomy has become something of a double-edged sword. By providing global teams with a ‘menu’ of marketing trends and ideas, this has led to significant duplication of effort. It has also meant a lack of core capabilities across the group.
In response to these challenges, it has set up ‘agile brand communities’ and ‘conscious create teams’. This has seen some early success.
The work of such teams enabled the central and effective creation of a Smirnoff Ice advertising campaign for over 20 markets. This covered different pack sizes, formats, flavours, and languages. Such a format also resulted in significant cost reductions.
Relationship industry
The spirits industry is very much a relationship-driven world. This is a really important fact that many investors forget.
Diageo has a very fine line to navigate. It has already earmarked £625m of cost savings. This is up from £500m earlier in the year.
But if it cuts too fast and too deep, the danger is that marketing teams will loss crucial person-to-person relationships, which are bespoke across regions.
The last time the company went through an aggressive cost-cutting exercise back in 2017, this is exactly what happened.
Building core capabilities across an organisation, particularly a large one like Diageo, takes years. Think of all the boots on the ground, building relationships with local suppliers and distributors. And do not forget the local outlets that it sells into are businesses, too. They look to its commercial acumen to help them grow.
Structural vs cyclical
One of the biggest debates surrounding the spirits industry today is the structural versus cyclical one. Gen Z is drinking less. Is this just a fad or a long-term trend? Are weight loss drugs and hemp-derived beverages partly to blame?
I am becoming increasingly convinced that investors are letting such questions completely drive the narrative. Consequently, they could be missing a golden opportunity to buy into a high-quality business with enviable brand power.
Remember, alcohol moderation is not a new trend. It has been around for over a decade. Its origins can be traced to long before the vast majority of Gen Z reached legal drinking age.
Bottom line
For me, the long-term investment case for the business remains strong. The company’s world-class brands, deep distribution, and pricing power give it a distinctive competitive edge.
While short-term challenges may continue to weigh on sentiment, I believe the current Diageo share price already reflects much of the bad news. I view the share price weakness as an opportunity, and I’ve started building a position in my portfolio before market confidence eventually returns.
