Diageo (LSE: DGE) shares have witnessed a significant decline, currently trading around 55% below their all-time highs. The outlook for the company heading into 2026 appears challenging. Several factors contribute to this grim perspective, necessitating a closer examination of Diageo’s future potential.
Challenges Facing Diageo
One primary issue is the shifting drinking habits of consumers. Younger generations are prioritizing health, leading to reduced alcohol consumption. Additionally, weight-loss drugs, such as GLP-1, are impacting older consumers. Reports indicate that approximately 40% to 45% of GLP-1 users reduce their alcohol intake after beginning treatment.
Economic factors further complicate Diageo’s situation. With consumers facing tighter budgets, spending on premium brands like Johnnie Walker and Tanqueray is declining. The International Wine and Spirits Record (IWSR) noted that global Scotch whisky sales dropped by 3% in the first half of 2025, marking three consecutive years of decline.
Production Adjustments
As a response to declining sales, Diageo has adjusted its production levels at various distilleries to better align with current demand. This situation is exacerbated by incoming U.S. tariffs, which threaten to cut into operating profits. Furthermore, Diageo’s considerable debt adds pressure, with interest payments becoming a substantial financial obligation.
Can the New CEO Drive a Turnaround?
On a more optimistic note, Diageo has appointed a new CEO, Dave Lewis. Known for his turnaround success at Tesco, Lewis is faced with the daunting task of revitalizing Diageo’s performance. Potential strategies may include:
- Divesting underperforming brands or reducing dividends to alleviate debt.
- Enhancing cost-cutting measures by improving supply chain efficiency and automating operations with AI.
- Focusing on non-alcoholic beverages to attract health-conscious younger consumers.
- Resolving inventory management issues.
- Adjusting pricing and bottle sizes to maintain brand accessibility.
Notably, lower interest rates, especially in the U.S. throughout 2026, could bolster consumer spending, particularly on premium brands. If Lewis can execute a successful turnaround, there’s potential for a rebound in Diageo’s share price.
Investment Outlook
Currently, Diageo shares are valued at a low forward-looking price-to-earnings (P/E) ratio of 12.5 based on the upcoming financial year’s earnings forecasts. While uncertainties remain regarding Lewis’s ability to effect change, the shares, priced near £16, present an interesting investment opportunity.
While investors should remain cautious, the potential for a rebound could make Diageo worth watching as it navigates a challenging environment in pursuit of recovery.
