Diageo (LSE: DGE) shares are down 28% over the past year, reflecting a sharp deterioration in sentiment towards global spirits demand.
But the bigger question for investors is whether this is simply a normalisation phase… or the market starting to price in something more permanent.
Why Diageo’s weakness may be being misread
Strip away the noise, and the message from the new CEO about the H1 results is relatively simple: spirits demand is not collapsing — consumers are simply trading down and moderating spend under economic pressure. That points to a cyclical reset, not a structural break.
Penetration of spirits remains broadly stable across its key markets, and consumption frequency has not materially deteriorated. Where weakness is emerging is not in whether people are drinking, but in how much they spend per occasion.
This distinction matters for investors. Cyclical moderation typically reflects temporary pressure on disposable income, whereas structural decline implies a permanent reduction in category demand and earnings power. The current evidence continues to support the former rather than the latter.
Is premiumisation broken?
Premiumisation has been one of the most powerful long-term drivers in the spirits industry, and Diageo has been a clear beneficiary of that trend.
The key point is that premiumisation itself is not broken. Consumers are not abandoning higher-quality spirits, and the company’s premium portfolio continues to perform well across core markets.
What has changed is the source of growth. In a more constrained consumer environment, premium mix expansion is no longer the sole driver of category growth. Instead, demand is spreading more evenly across price points and consumption occasions.
Market cycle response
In response, the company is broadening its portfolio reach. Rather than relying solely on premiumisation, it is strengthening its price-pack architecture, expanding smaller pack formats, and rebuilding participation in value-oriented segments where it is underweight.
Importantly, this is not a strategic reversal, but an adaptation to cycle conditions. Premium brands such as Johnnie Walker, Tanqueray, and Don Julio remain central to the long-term value creation story.
As consumers trade down rather than exit the category, Diageo is repositioning to capture demand across the full spectrum of spending behaviour. This includes greater exposure to smaller packs and the fast-growing ready-to-drink (RTD) category.
These moves are designed to improve participation in the parts of the market where volume growth is currently strongest.
What’s the verdict?
In my view, the market is still overemphasising cyclical weakness and underestimating portfolio resilience. Diageo is adapting to where demand is strongest, not where it used to be.
Beyond the cycle, there is also a more gradual turnaround story taking shape. Management is refocusing the business on execution, innovation discipline, and customer engagement after years of operational drift.
That matters because long-term value creation in spirits is driven as much by brand strength and route-to-market execution as it is by category growth.
If the group can improve innovation effectiveness and rebuild sharper commercial execution, the combination of stabilising demand trends and better internal focus should support a re-rating over time.
With the long-term growth story very much intact, I recently added to my position. I’m also watching a number of other beaten-down stocks closely.
