The world's largest producer of spirits has announced a $1 billion cost-cutting plan

Diageo, a giant in the spirits market that owns brands such as Smirnoff vodka and Johnnie Walker whiskey, announced a three-year cost-cutting program totaling $1 billion. Investors reacted optimistically: the stock price jumped nearly 6% during trading on August 6 in London, even though the announcement was made at the same time as the release of the annual report, which showed a decline in sales and profits.

Diageo plans to cut costs by $1 billion during 2027–2028, and the company believes that the additional benefits from supply chain optimization will continue into subsequent years. Implementing the program will require $1.2 billion in expenditures.

The company plans to generate savings by optimizing both its operations and supply chain in order to allocate more resources to the development of key brands. “These savings will allow us to invest in the recovery of our business without having to reduce adjusted operating profit,” The Wall Street Journal quoted Diageo CEO Dave Lewis as saying. He declined to tell the WSJ how many jobs the company has already cut or plans to cut. According to him, positions are being eliminated in divisions where the same functions are duplicated across different markets.

Diageo's new strategy is built around three key areas: enhancing the competitiveness of its core brands in light of changing consumer preferences, strengthening its customer focus, and creating a more flexible and efficient operating model, Lewis said.

During trading on August 6, Diageo shares in London jumped 5.6% and reached their highest level since February. The company’s American Depositary Receipts rose more than 5% during trading in New York.

In January 2022, Diageo was the third-largest company by market capitalization on the UK’s FTSE 100 index, with a market value of nearly 90 billion pounds sterling (about $121 billion). Since then, the company’s stock price has more than halved, and over the past 12 months, it has lost nearly 9%. The decline in the stock price is due to a crisis in the alcoholic beverages industry caused by changes in consumers’ drinking habits, according to Reuters.

Lewis, the former head of the British supermarket chain Tesco, took the helm at Diageo at the beginning of the year with the task of restructuring the company and improving its performance, according to the WSJ. At Tesco, he was also involved in restructuring the business, which earned him the nickname “Radical Dave,” Reuters notes.

For fiscal year 2026, which ended on June 30, the company’s comparable revenue declined by 2% to $19.6 billion. At the same time, adjusted operating profit rose 2% to $5.7 billion, primarily due to cost reductions, which partially offset the negative impact of import duties. Diageo’s net income fell by 23% to $2 billion, mainly due to restructuring costs.

The World Cup had a positive impact on the results. In particular, sales of ready-to-drink alcoholic beverages jumped by more than 35% thanks to the launch of Casamigos ready-to-drink cocktails during the tournament.

Diageo expects comparable revenue for the new fiscal year to remain roughly at the previous year’s level, while revenue in North America is expected to decline by a mid-single-digit percentage. The company anticipates that the regional market will contract by approximately 3%, but expects to improve its market share compared to fiscal year 2026.

According to the company's forecast, comparable operating profit will increase by a low- to mid-single-digit percentage due to the impact of the cost-cutting program.

Free cash flow for fiscal year 2027 is expected to total approximately $2 billion, after accounting for approximately $850 million in one-time expenses related to the implementation of the restructuring program.

In the medium term, Diageo expects to return to sales growth and anticipates an improvement in financial performance thanks to cost savings from its cost-cutting program, as well as a more favorable product portfolio mix and pricing strategy. Over the next three years, Diageo expects to generate approximately $8 billion in free cash flow after accounting for one-time restructuring costs.

A large-scale cost-cutting program fully offsets the weaker-than-expected sales forecast, Citi noted. CNBC cited the investment bank's view.

Analysts at JPMorgan noted that Diageo’s outlook turned out to be better than they had feared: the company did not warn of a decline in margins and remains cautiously optimistic about revenue growth, according to the WSJ.

It remains unclear how Diageo will be able to achieve its goal of growing sales faster than the overall alcoholic beverages market, given that the company has not always been successful in certain segments in the past, Reuters quotes Mark Nelson, an analyst at Killik & Co.

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