There is a paradox at the heart of Diageo (LSE: DGE) shares. On one hand, it remains one of the world’s leading premium drinks companies, with a portfolio of globally recognised brands and strong long-term pricing power.
On the other hand, the market’s reaction has been far less enthusiastic in recent years. Concerns that first emerged after a slowdown in Latin America have weighed on sentiment, and the share price has struggled to regain momentum since.
Even as the business takes steps to address these challenges and reset its growth trajectory, investor confidence has yet to fully return. That raises a key question: what will it take for the market to believe in Diageo shares again?
What is Diageo doing to turn things around?
The new chief executive has set out an early turnaround plan focused on sharpening execution and adapting the business to a more challenging consumer environment.
At the centre of this is a reset of the growth strategy across key categories. Rather than relying purely on premiumisation, the business is strengthening performance across different price points.
In the US, its largest market, consumer pressure has been most evident. In response, Diageo is increasing exposure to value segments and smaller pack formats, where demand has held up better.
Alongside this, the company is placing renewed emphasis on customer relationships and execution. It has acknowledged weaknesses in its go-to-market capabilities, including inefficient ordering systems and underinvestment in service. Addressing this is now a priority, alongside rebuilding capacity in key brands such as Guinness.
Finally, the company is restructuring its operating model to improve accountability, speed of decision-making, and cost efficiency, aiming to make the organisation more agile and responsive to current conditions
Why does the market remain unconvinced?
Despite these actions, it’s still unclear whether they will be enough to restore investor confidence. The signals from Diageo’s core markets remain mixed, leaving room for very different interpretations of the same trends.
On one hand, there are concerns that the spirits industry is facing structural pressure. Slower growth in key regions such as the US, alongside debates around moderation trends and shifting attitudes towards alcohol, has led some investors to question whether the category can continue delivering the growth it once did.
On the other hand, Diageo’s analysis suggests a more resilient picture. While consumption patterns are changing, overall demand remains broadly stable, with consumers adjusting when and how they drink rather than exiting the category. Premiumisation also remains present, albeit less consistently than before.
The result is a market caught between two views: one seeing a structurally slower growth industry, the other a cyclical slowdown driven by consumer pressure. Until one narrative becomes dominant, Diageo is likely to remain a ‘show me’ story rather than a re-rating candidate.
Bottom line
My view is that Diageo remains a high-quality global business with the potential to recover over the long term as execution improves and consumer conditions normalise.
However, the timing of any sustained re-rating is far from certain given the mixed signals across its key markets. I have recently started buying the shares, and while I would not view them as a short-term recovery story, I think they’re worth considering for long-term investors willing to be patient.
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Andrew Mackie owns shares in Diageo.
