Diageo, one of the world’s leading beverage alcohol companies, released its Fiscal 2026 Q1 trading statement, reporting a 2.2% decline in reported net sales to USD 4.9 billion.
The decline was primarily attributed to the negative impact of portfolio disposals, while foreign exchange effects were negligible. Organic net sales remained flat, as 2.9% volume growth was offset by a 2.8% negative price/mix, driven largely by weaker results in Chinese white spirits (CWS) within the Asia Pacific region. Excluding this segment, price/mix would have remained broadly stable.
The company experienced solid organic growth in Europe, Latin America & Caribbean (LAC), and Africa, but these gains were offset by softness in North America and a sharp decline in CWS sales in China, which negatively impacted total group net sales by approximately 2.5% during the quarter.
Strategic and Operational Outlook
Diageo continues to execute its Accelerate programme, designed to streamline operations and build a more agile organization. The initiative remains on track to achieve approximately USD 625 million in cost savings over the next three years, primarily through improved cost efficiency, smarter allocation of A&P (advertising and promotion) spend, and process simplification.
Interim Chief Executive Nik Jhangiani acknowledged the challenges faced during the quarter, stating:
“Net sales were flat organically in Q1, with growth in Europe, LAC, and Africa offset by weakness in Chinese white spirits and a softer US consumer environment than planned for. We are not satisfied with our current performance and are focused on what we can manage and control; acting with speed to drive efficiencies, prioritising investment and adapting more quickly to an evolving consumer environment.”
He emphasized that the company is sharpening its commercial execution and embedding a performance-driven culture to ensure sustainable, long-term growth. Early signs of improvement have been seen, particularly in Europe, where Diageo has implemented initiatives to strengthen market responsiveness and retail activation.
Updated Fiscal 2026 Guidance
Diageo revised its outlook for the full fiscal year to reflect the headwinds in China and the United States:
- Organic net sales growth: Expected to be flat to slightly down, reflecting the adverse impact from CWS and weaker U.S. consumer confidence.
- Organic operating profit growth: Forecasted to be low to mid-single digits, supported by cost savings and positive operating leverage.
- Tax rate: Around 25% (Fiscal 2025: 24.9%).
- Effective interest rate: Approximately 4.0% (Fiscal 2025: 4.1%).
- Capital expenditure: At the lower end of the USD 1.2–1.3 billion range (Fiscal 2025: USD 1.5 billion).
- Free cash flow: Expected to reach USD 3 billion (Fiscal 2025: USD 2.7 billion), including exceptional cash costs related to Accelerate.
The company reiterated its commitment to generating USD 3 billion in free cash flow for Fiscal 2026 and returning to its target leverage ratio of 2.5–3.0x by Fiscal 2028. This target will be supported by selective disposals and ongoing improvements in working capital management.
Accelerate Programme – Progress Update
Launched in May 2025, the Accelerate programme aims to build a stronger operational foundation and optimize investments. Key achievements highlighted during the quarter include:
- Enhanced cost efficiency in A&P, utilizing advanced tools such as Catalyst to refine targeting and maximize ROI.
- Broader AI adoption to improve data analytics, enabling sustainable efficiency gains.
- Simplification of internal processes to support faster decision-making and reduce complexity.
- Continued progress towards USD 625 million in cost savings within three years.
Market Performance Overview
- Europe: Delivered solid organic net sales growth, supported by improved execution and steady demand for key brands.
- Latin America & Caribbean (LAC): Maintained strong momentum, driven by robust local demand and premiumisation trends.
- Africa: Continued positive performance, with growing volumes and strong beer sales.
- North America: Weaker results due to declining U.S. spirits consumption and the absence of last year’s tequila restocking effect.
- Asia Pacific: Significantly impacted by weaker consumption of Chinese white spirits; however, Scotch brands such as Johnnie Walker and beer brands like Guinness showed growth.
From a category perspective, Scotch whisky, beer, and ready-to-drink (RTD) products demonstrated resilience. Brands such as Johnnie Walker, Guinness, and Smirnoff Ice posted strong performances, while tequila and CWS underperformed.
Tariff Outlook
Diageo maintained its estimate for the annualized impact of U.S. import tariffs at approximately USD 200 million pre-mitigation, assuming tariffs remain at 10% for UK imports and 15% for EU imports. The company expects to mitigate about half of this impact through operational and pricing strategies.
Looking Ahead
Despite current headwinds, Diageo remains confident in its long-term strategy. The company’s focus on portfolio premiumisation, data-driven investment allocation, and cost discipline is expected to strengthen its financial flexibility and support sustainable growth.
“We are well advanced in sharpening our strategy,” added Jhangiani. “Our goal is to ensure that Diageo continues to meet the evolving expectations of consumers while delivering disciplined growth and robust cash generation.”
With a resilient portfolio, global brand equity, and improving efficiency under the Accelerate programme, Diageo aims to navigate current challenges and position itself for renewed momentum in the coming fiscal years.
Source: Diageo