Diageo plc (LON: DGE)
US Spirits down 15%. Africa up 17%. Shares 45% off their peak.
Dear reader,
Diageo reported its fiscal 26 third-quarter numbers on Wednesday. Organic net sales grew 0.3%. Reported net sales rose 2.3% to $4.5bn. Full-year guidance was reiterated, organic net sales down 2-3%, organic operating profit flat to up low-single-digit. On paper, a company holding the line.
The surface is misleading.
Beneath those tidy headlines, this is a business fighting a two-front war and winning one of them convincingly. Europe, Latin America and the Caribbean, and Africa all delivered high-single-digit organic growth or better. Guinness is on a tear. Scotch is growing. The FIFA World Cup advance buying is flattering a few lines, but the underlying momentum in those regions is real, and it deserves credit.
The problem is North America. And North America is not a rounding error, it is 38% of group net sales, and it fell 9.4% organically in the quarter. US Spirits was down 15.4%, weaker than actual depletions by around five percentage points. That gap matters: it means the trade channel was actively destocking on top of an already soft consumer backdrop. In my view, that is no longer a cyclical wobble. It is something more structural, and the investment case hinges almost entirely on whether it can be fixed.
New CEO Sir Dave Lewis appears to share that read. “North America remains our biggest challenge, where market conditions are soft and our offer needs to be more competitive.” That is the kind of candour that tends to either mark the bottom of a difficult period or the beginning of a very long restructuring story. The strategic update due 6 August will be the real test of whether Diageo has a credible answer.
Forward P/E: 15.8x
Dividend Yield: ~4.0%
EV/EBITDA: 11.4x
Debt/Equity: 1.82x
ROE: 19.7%
The Numbers, Region by Region
Europe was the standout, delivering 8.8% organic net sales growth, its best quarterly performance in some time. Guinness is doing the heavy lifting, with net sales up double-digit in Great Britain and Ireland, and the brand showing no signs of losing the cultural momentum it has built over the past two years. Spirits growth was led by Johnnie Walker in MENA and Türkiye, with Central and Eastern Europe also contributing. Price/mix of +2.6% tells you this isn't just a volume story, consumers in the region are still trading up. For a market that spent much of the post-pandemic period wrestling with cost-of-living pressures, that is a meaningful signal.
Latin America and the Caribbean grew 16.2% organically. That number carries a caveat, Diageo’s own statement acknowledges some benefit from pull-forward buying ahead of the FIFA World Cup and Easter timing in the quarter, so the clean underlying rate is likely lower, though unquantified. What is clear is that the broad base of the growth is genuine: Brazil delivered double-digit volume growth with positive price/mix, Smirnoff Ice continued its strong run, and scotch grew double-digit across multiple markets. Mexico was the exception, declining high-single-digit as the business further implemented its broader portfolio participation strategy a deliberate repositioning rather than market share loss, but one to watch. LAC is increasingly a region Diageo can lean on, caveat and all.
Africa grew 17.1% organically, driven by double-digit growth in both East Africa and South, West and Central Africa. Tanzania and Uganda delivered strong double-digit growth. South Africa contributed meaningfully. Kenya Cane led spirits. Serengeti drove beer. Smirnoff Ice was strong in RTDs. The consistency of Africa’s performance is genuinely underappreciated, it has now been a reliable, high-growth engine for several consecutive periods, and at 8% of net sales it remains underpenetrated relative to its long-run potential.
Asia Pacific fell 0.8% organically, dragged entirely by Greater China. Chinese white spirits declined double-digit, reflecting reduced consumption driven by market policy changes rather than brand weakness, but the distinction offers limited comfort when it is removing roughly 0.6% from group net sales every quarter. The rest of the region performed better: international premium spirits grew low-single-digit, and Guinness posted double-digit organic growth, benefitting from the transition to a licence brewing model. India was a mixed picture, the Maharashtra excise tax increase hit volumes in that state, but the rest of India grew high-single-digit, a useful reminder that the India structural story remains intact.
The North America Problem
US Spirits organic net sales fell 15.4% in the quarter. Not low-single-digit. Not high-single-digit. Fifteen percent. That is the number that defines these results, and it demands more than a passing mention.
The immediate explanation from management is a combination of factors: soft market conditions, the need for a more competitive offer, lapping tough prior-year comparatives from pre-tariff distributor pull-forward, and tequila restocking that inflated the base period. All of those are real. None of them fully explains a 15.4% decline on their own. The fact that shipments were also weaker than depletions by around five percentage points, meaning distributors were running down stock rather than replenishing it, suggests the trade has lost confidence in near-term demand. That is a harder problem to fix than a tough comparative.
Tequila is the sharpest pain point. The category declined double-digit overall, hit simultaneously by tough prior-year comparatives, intensifying competitive pressure from smaller premium brands, and what increasingly appears to be genuine category softness. The premium tequila supercycle, the cultural moment that turned Don Julio into a household name is cooling. Whether that is a pause or a structural deceleration is one of the most important questions in the global spirits industry right now, and Diageo is more exposed to the answer than it would like to be.
There is a genuine bright spot in the region: the Diageo Beer Company USA grew 9.1%, led by Guinness and Smirnoff RTD. That is not nothing, it shows the brand architecture has pockets of real strength in the formats that the American consumer is currently choosing. But at its current scale, beer and RTD growth cannot offset a 15.4% decline in the core spirits business. The maths do not work.
"North America remains our biggest challenge, where market conditions are soft and our offer needs to be more competitive. Actions are already underway to address this."
— Sir Dave Lewis, Chief Executive Officer
What Lewis Has Done So Far and What August Needs to Deliver
Sir Dave Lewis is not a stranger to corporate repair jobs. His tenure at Tesco arriving into a profit restatement scandal and leaving with a business that had genuinely and durably recovered, is the reason the Diageo board reached for him when the previous regime ran out of road. That track record matters. But Tesco was a different kind of problem. This one has a specific complexity that operational discipline alone cannot resolve: Diageo's portfolio in North America is misaligned with the direction of consumer demand, and fixing that requires strategic choices, not just cost cuts.
To be fair to Lewis, the operational work underway is real and is bearing fruit. The Accelerate cost programme is on track to deliver c.$300m in savings by end of fiscal 26, with the full programme targeting c.$625m over three years. Capital expenditure is guided to the lower end of the $1.2-1.3bn range, down from $1.5bn last year, reflecting genuine financial discipline. Free cash flow guidance of c.$3bn, up from $2.7bn in fiscal 25, is a meaningful number that gives Lewis room to manoeuvre on the balance sheet. The disposals, USL’s RCB business sold in March 2026, the EABL shareholding sale expected to complete in calendar H2 2026, are further evidence of a team streamlining the portfolio and reducing leverage rather than papering over the cracks.
The target is to return to the 2.5-3.0x net debt to EBITDA range no later than fiscal 28. From the current 3.4x, that requires sustained FCF delivery and disciplined capital allocation. It is achievable but it leaves limited margin for error.
Cost cuts and disposals are the easier part of a restructuring. The harder part defining how Diageo competes in North America in a post-supercycle world is what the 6 August strategy update needs to answer. Does it double down on premiumisation and wait for the cycle to turn? Does it aggressively build out its RTD and beer-adjacent categories where it is finding traction? Does it pursue M&A to rebalance the portfolio toward faster-growing formats? Or does it accept that North America will be a lower-growth, cash-generative business for several years while Europe, Africa and LAC do the heavy lifting?
Any of those paths could be credible. What would not be credible is vagueness. The market has been patient, more patient than the share price suggests but patience has a limit. Lewis has one shot at the August presentation to reset expectations on a firm factual foundation. A credible, specific, and honestly-costed plan for North America is not optional. It is the price of admission for any re-rating.
