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The Diageo (LSE: DGE) share price has fallen more than 55% since early 2022, while the FTSE 100 has climbed around 35% over the same period.
For a long time, I saw the stock as a classic falling knife and stayed well away. But markets often overshoot in both directions. Taking a contrarian stance is never easy – yet with sentiment now washed out, I have finally stepped in and bought the stock. Here’s why.
Premiumisation
The dominant narrative is that alcohol demand is in structural decline. Younger consumers are drinking less, household budgets are stretched, and GLP-1 weight-loss drugs are supposedly reshaping consumption habits.
I do not dismiss these trends – but they do not explain the scale of the share price collapse. The real issue has been pricing power in the US.
After Covid, Diageo raised prices aggressively, and distributors built unusually high inventories of premium tequila and whisky.
Well into 2023, even as the share price was falling, shipments of Casamigos and Don Julio grew ahead of depletions. In other words, it was still pushing premium products into the channel, confident of demand and eager to grow market share in high-margin segments.
Misjudged strategy
The problem was that consumer habits were shifting. The cost-of-living crisis was the most visible sign, but there were other knock-on effects.
Post-pandemic, many markets saw weaker on-premise sales in bars and restaurants – a key channel for high-end spirits.
I do not think Diageo’s premiumisation strategy was wrong. It simply misjudged timing and market conditions. Inventory cycles are temporary; strong brands endure.
Changing market
Premiumisation in total beverage alcohol (TBA) remains a solid long-term trend. What we have seen recently is a temporary slowdown at certain spirits price tiers following the end of a three-year Covid ‘super-cycle’.
Diageo has adapted its marketing strategy as the market evolves. A big focus is on at-home socialising, but also on understanding what truly motivates consumers.
Younger drinkers, influenced by social media trends, are drinking differently depending on the occasion. Ready-to-drink (RTD) formats are one innovation tapping into this shift, supporting the broader moderation trend rather than countering it.
Bottom line
But now we’ve reached an interesting moment. Diageo trades on just 13 times forward earnings, its lowest valuation in more than a decade. It also sports a very respectable 4.3% dividend yield. So the question is not what happened, but whether the market is being too pessimistic.
From my perspective, it is. The share price reflects short-term worries about consumer spending and inventory cycles, not the enduring strength of its brands. Premiumisation remains intact, and Guinness, Don Julio, and others still command pricing power and loyalty.
I see this as a chance to take a contrarian stance. Cash flows are strong, and even a modest rebound in growth could materially enhance shareholder returns. That is why I recently started buying the shares, although it is a modest investment to start with.