The FTSE 100 has seen plenty of volatility this year, but few moves have been as dramatic as Diageo’s (LSE: DGE) 6.5% slide in a single day following its Q1 update. With the shares now down 32% year-to-date, I’m increasingly convinced the market is misreading the situation – and the sell-off looks overdone.
Q1 update
The alcoholic beverage company’s performance in Q1 was mixed. Organic net sales were broadly flat, with growth in Europe and Latin American offset by a poor performance in North America and China. The latter in particular was impacted by weak white spirits sales.
In Europe, Guinness was a standout, supported by steady growth in Johnnie Walker. Latin America and Africa both delivered solid double-digit and high-single-digit growth respectively, supported by improving consumer trends and strong execution in core brands.
The spotlight, however, was on the US, its largest market. Spirits sales fell 4.1% amid ongoing cost-of-living pressures. Tequila, historically a key growth driver, faced heavy promotional activity as consumers traded down within the category.
Premiumisation
Despite a weaker quarter, the company is not abandoning its core strategy of premiumisation. Instead, it’s simply managing the ‘ladder.’ In the ultra-premium tequila segment, where prices have risen significantly, some consumers are trading down due to tighter household budgets.
Rather than letting these customers leave for competitors, it’s leaning into more accessible premium options, keeping them within the brand family.
This is not a shift in strategy – it’s protecting premiumisation. Consumers trading from higher-end tequila to more affordable Diageo options stay within the portfolio and can trade back up as spending recovers.
In my opinion, the long-term growth drivers for tequila remain intact: rising cocktail culture, wider adoption of sipping spirits, and international expansion. I think what we are seeing now is the category getting back to normal after the post-Covid surge, not tequila going into decline.
Structural versus cyclical
Two macro trends are often discussed in relation to Diageo. First, the rise of GLP-1 weight-loss treatments and their potential effect on drinking habits. Second, younger consumers — Gen Z in particular — appearing to be moderating alcohol intake, favouring ready-to-drink beverages or lower-alcohol options.
These trends are worth noting, but context matters. There is currently no conclusive evidence that widespread GLP-1 adoption reduces alcohol consumption – most reports remain anecdotal. Alcohol moderation among younger drinkers is real, but it is not new. It has been shaping behaviour for more than a decade.
In my view, neither factor explains the 50%+ share price decline over the past three years. The main driver is the end of the Covid ‘super cycle’ in the US, when distributors overstocked and pricing power softened. These trends are manageable, yet the market seems to be treating them as structural, which I believe is overdone.
Bottom line
Diageo’s Q1 numbers, although weak, did not come as a surprise to me. The reality is that the US economy is struggling more than most analysts realise.
The important thing to remember is that this is temporary. Back in the 1980s, Warren Buffett bought Coca-Cola stock. He looked through all the short-term noise and focused on the long-term power of its brand.
I see the same principle at work with Diageo today. That is why I recently bought it – and remain optimistic about its long-term growth.
