Over the course of his career, Dave Lewis has earned the nickname “Drastic Dave” for the ruthlessness he brings to corporate turnarounds. Nine months into the CEO job at Diageo, he has applied a familiar strategy: a $1.2bn restructuring programme, funded by $1bn in additional cost savings over the next three years.
The market’s response has left little doubt over how investors view his plans. But the real sign of the success of Lewis’s strategy will be a return to sustained growth. Diageo’s sales have stagnated over the past three years and were down 2% on an organic basis in the year ended 30 June. Set against that backdrop, the enthusiastic share price reaction looks more like relief that someone has finally got to grips with the cost base than a clear sign the turnaround can work.
That focus on costs and operational simplicity is important. Lewis, formerly of Tesco and Unilever, has ruled out further M&A or major disposals once the sales of East African Breweries and the Royal Challengers Bengaluru cricket franchise complete. He has also set a minimum annual dividend floor of 50 cents – a level of clarity investors have been crying out for. That takes from his Tesco playbook, where he sold off Thailand and Malaysia operations to clear the debt pile and streamline operations.
But strip away the restructuring and the story is still one of a premium spirits giant struggling to sell spirits. That only Guinness and Johnnie Walker were singled out as “standout performers” is telling – much of the rest of the portfolio is underperforming. Sales in Europe, Latin America and Africa are up, but North America and Asia Pacific are struggling. A $1bn efficiency drive can fix how Diageo is run and improve its profit margin, but it doesn’t fix why fewer people in its most valuable markets are buying its products.
There are plans to address this by leaning into RTD and smaller bottle sizes, improving brand strength and focusing on “impactful” innovation. And the breathing space bought by cost discipline will give Diageo time to rework its offering for a younger generation who drink differently.
Investors and analysts have rewarded that discipline. But the industry and Diageo’s own people will be watching for evidence of something much harder to do: bring back demand. Cutting costs is the easy half of a turnaround. Lewis’s reputation will ultimately depend on whether he can get Diageo growing again.
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