For years I have been outspokenly negative about alcohol stocks, mainly the big three Western spirits companies. My criticism circled around managements’ constant denial of the new reality, over-expansion, high debt loads, what I call “the dividend burden”, and still-excessive valuations — despite huge, unprecedented share price drops. With this view, for long I was paddling against the consensus. Naturally, at some point these stocks should become interesting again. I don’t think we are there, yet. But something is changing.
Important disclaimer: All content is for information, educational, and entertainment purposes only and does not constitute personal investment recommendations or advice, but the sole personal, highly subjective opinion of the author.
Summary and key takeaways from today’s Weekly
– Stocks of spirits makers have taken a big hit.
– The volume bleeding in the businesses continues, but under the hood something is changing.
– Although it could finally be the long-awaited strategic shift, I remain cautious.
It must have been a shock for many investors who see themselves as cautious, conservative, defensive, income oriented — or whatever you want to call it.
Alcohol stocks, respectively the big spirits powerhouses, once were seen as high-quality names where practically nothing could go wrong. Until something went wrong in a big way. Instead of boring businesses with a reliable performance through all phases of the cycle, exactly these “quality-has-its-price” compounders failed miserably.
Many investors burned their fingers and got disappointed. Who’d have thought to see these market-leading companies experience share-price drops of 50–70% within a few years, while broader markets continue making new highs?
For Financial-Engineering readers this is not a big surprise.
Looking forward, it is clear that aggressive reluctance, kicking the can down the road, and waiting for a miracle is not the solution. Instead, something needs to change.
And it looks like a 180-degree turnaround might be on the table.
But not in a way many would expect.
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Important disclaimer: All content is for information, educational, and entertainment purposes only and does not constitute personal investment recommendations or advice, but the sole personal, highly subjective opinion of the author.
Bottom of the barrel in sight?
The spirits sector is one of those that I am covering with high interest.
I was personally never invested, and until this day I have not published any research report for my members. The setups simply did not allow for it.
As mentioned in my intro, certain hurdles have so far held back a recovery:
- denial of the new reality — previously guided recoveries are being constantly postponed; maybe next time. Or thereafter.
- Over-expansion — extremely high inventories while consumer sentiment remains weak.
- High debt loads — pressure is increasing.
- the “dividend burden” — most of free cash flows paid out to shareholders.
- Still-excessive valuations — factoring in debt and negative growth, it has been hard to spot attractive valuations.
Admittedly, plenty of hot air has been left out of the balloon.
I mean, share-price declines of 50–70% for these still high-margin businesses look extreme. They certainly are, I do not disagree at this point.
Where I disagree, though, is that this has not been an overreaction to the downside. To the contrary, my view is what we have experienced is a correction of a previous excess, coupled with a painful adjustment to a new, bitter reality.
A paradigm shift has happened — with more to come.
This new reality includes cautious consumers, high and pressing cost of living issues, too-aggressive pricing, and a changed landscape regarding alcohol consumption in general.
In the past, I have written the following weeklies:
- exactly two years ago about Brown-Forman (ISIN: US1156372096, ticker: BF.B — see here) — the stock fell from around 35 USD to currently 27 USD
- in April 2025 about Pernod Ricard (ISIN: FR0000120693, ticker: RI — see here) when its dividend started to yield 5% — now, it’s closer to 7.5%, and shares fell by a third
- in August 2025, Diageo (ISIN: GB0002374006, ticker: DGE — see here) followed — the ticker dropped from above 2,000 pence to temporarily below 1,400 pence, now around 1,600 pence
What the companies are doing is aggressively cutting costs and investments.
This is fine on paper, but first it has a natural limit, and second it does not solve the demand weakness. And the pressing debt on the balance sheet.
As a reminder, younger generations seem to be drinking less than the previous generations. The drop in interest is especially pronounced with the youngest, Gen Z.
In that sense, I am not anticipating a surprising demand recovery — with everything else unchanged.
While reported sales, margins, earnings, and cash flows have not collapsed, yet, even still holding up relatively well, volumes have fallen, and the market has priced in much weaker business for the future.
It is hard to blame the younger people for drinking less, for whatever reason.
Being it a higher health consciousness, enjoying less instead of drinking a beer for breakfast, wine to every dinner, and a dram of whisky before going to bed (I am deliberately over-exaggerating), and, not to forget, higher costs. Going out for a drink has become a luxury for many, while the aggressive premiumization of the producers has led to a decoupling from what many consumers can and want to afford.
Alcohol was, is, and will always remain a discretionary or even luxury item — not an everyday essential.
Paired with maybe a cyclical downswing, this is a bitter blend to swallow.
As a reminder, during the 2008 crisis, unlike food or tobacco, alcohol stocks suffered — despite the saying that during a crisis people smoke and drink even more because they lost their jobs and fell into depression. Even if taking it seriously, they likely won’t buy blue-label Johnnie’s or 18-years or longer aged Scotch, but entry-level stuff. Pernod Ricard by the way back then cut their dividend.
In my view the companies today are putting too much emphasis on the cyclical component to justify the weak performance. I cannot imagine they don’t know better. I assume they communicate as they do in order not to panic publicly. But I am sure that internally the pants are full.
The market is not stupid — else stocks would not have collapsed.
As a positive, what has happened so far, Diageo was the first to cut its dividend.
For long, I have been pounding the table that this is unavoidable. For many processed-food stocks, but also spirits companies. And not just Diageo — where I even assumed they would be able to keep it up longer than for example Pernod Ricard.
Be it, a first step in the right direction is done. Likely it was due to the CEO change while Pernod Ricard and Brown-Forman remain family-controlled.
Diageo announced not only a dividend cut, but also ongoing cost-cutting measures (under a “funeral-home atmosphere”), as well as a broader strategic review. The latter includes (potential) sales of non-core activities like an Indian cricket team (done, see here) or assets in less attractive jurisdictions (see here and here).
And, the CEO also clearly committed to debt reduction.
In August, with the presentation of the full-year results, Diageo intends to give a bigger strategic update.
Important to know, the new CEO is infamous for being an aggressive cost and assortment cutter, mainly from his tenures at British retailer Tesco (ISIN: GB00BLGZ9862, ticker: TSCO) as well as global consumer staples giant Unilever (ISIN: GB00BVZK7T90, ticker: ULVR).
In my view, this is what the entire sector needs — rightsizing.
Ironically, Tesco stock did not do much while he was in charge — only to take off later. But this just as a side note.
I think, despite the stock having reacted negatively, this was a promising start with a good decision to cut the dividend. And even despite Diageo having been one of very few British dividend aristocrats (for those who see this as a proof of quality). It shows, the CEO does not care about irrelevant series that represent the past, but that the focus is on today and the future competitiveness.
It will now depend on what Diageo communicates in their coming update. At this point, I am seeing them at the forefront of a possible shift in the industry.
Shift in which direction you might ask.
This is something I have started to think about myself for quite some time.
I noticed that promotions in local supermarkets intensified, with one from a competitor even running for two weeks straight. My favorite joke on Twitter is that as long as a single share of Diageo will not cost as little as a red-label bottle on sale (9.99 EUR), it will not be a buy.
But over the last days, I stumbled over an interesting piece. On one side, it adds another voice to confirm my existing stance, but it also gave me some new thoughts for a now firmer case for a likely roadmap.
Euromonitor International’s global insight manager of alcoholic drinks, Spiros Malandrakis, says (and confirms my view, see here) that the premiumization strategy has reached a ceiling. Market conditions simply are not improving as desired and hoped for, resulting in a prolonged slowdown.
Particularly in the US, non-alcoholic “spirits” and ready-to-drinks (whisky-cola etc.) are booming while the core part of the assortment remains on shelves.
In the past, the US and China had been targeted as core pillars of the premium growth story, but unfortunately exactly these two markets have been struggling in a big way. Taxes and tariffs are welcome to hide behind, but not enough to fool me. Pernod Ricard even started to exclude them on certain slides of their presentation to desperately being able to present some adjusted “if not for” growth figures.
Sure, why not eliminate almost a quarter in sales from the equation.
Malandrakis sees a “continued deterioration”, driven by negative macroeconomic and lifestyle factors.
But now comes the interesting part, looking to the future.
The “almost untouchable premiumization trend” that drove stocks, is about to do a 180 turnaround. He said (shortened, highlights mine):
I’m not suggesting that everything’s being traded down […], but I am clearly stating the monolithic premiumisation narrative of the past couple of decades, this idea that the only way is up and the only way is more premium – I think this has reached its limits.
The logical consequence to stop bleeding volumes and to attract new consumers would be to abandon ship, and focus on the lower-price segments. This was what Diageo’s new CEO hinted to, and in my view will likely expand on in the coming strategic update. Not the shrinking premium market is the future, but the more affluent mass market.
Malandrakis warned endless trading-up is an illusion, and disconnected from consumer reality. He also confirmed my view that this is not a cyclical issue, but a structural break:
We’ve had these arguments for like three years now. […] Now we could call it structural, we could call it cyclical. If we call it cyclical, it’s a very long cycle.
The only categories that are showing growth at all in the US, and higher growth than the core businesses elsewhere, are ready-to-drinks (RTD), and alcohol frees. RTDs even surpassed vodka as the leading spirit in the US on volumes recently.
However, my concern here is the less alcoholic and the more sugary these alternative drinks become, the harder the competition will be eventually. It is easy to get confused by or to switch to ice tee (with or without alc), soft drinks, energy drinks, fitness drinks or even just water. No matter how we twist it, it is a dilution and flip back from higher-volume premium sales.
That’s why I have been personally skeptical about this being the solution.
But Malandrakis made another point that raised my attention. Summed up, he sees the emerging trend of ”nihilistic indulgence” — living life today, enjoying while one can, not caring about tomorrow due to societal issues:
If there is no future, why would I optimise? Why would I be embracing sober curiosity and not have a little bit more fun as the world burns?
High and persistent inflation, job insecurity or even losses, prices of basics rising faster than wages, housing unaffordability, etc. seem plausible reasons.
In conclusion, he expects alcohol — and also cigarette — volumes to rise again. First indications are said to be lower participation in “Dry January” or “Sober October” periods, while life struggles are mounting. However, not the premium segment will come to life again, but the low- and middle-price offerings.
For me, this sounds like a very possible, realistic outcome.
It fits into many of my own personal observations and results of my analyses.
In other weeklies and also posts on twitter, I pointed towards possible pricing wars among producers of branded foods and drinks — making the “low valuation multiples” not low at all, when margins and earnings crater, to save volumes.
Even though this sounds like a final turnaround and a possible end to the negative-growth story, I am not rushing into spirits stocks just yet.
Below, are the sales for all three of them which have been declining over the last years.
note: ignore the total sales figures, as GBP, EUR, and USD are stacked up. The shrinking bars tell you what you need to know.
The reason for me hesitating is premium brought higher margins.
Consequently, even if volumes and sales start recovering and rising again, it is very likely in my view that earnings and cash flow margins could take a hit, reversing the previous tailwind.
With still much debt to address — Diageo for example carries around about 20 billion USD in net debt while the FCF target is 3 billion USD — and valuations not being on desperately-low levels (Diageo EV / FCF of c. 22x, Pernod Ricard c. 25x, Brown-Forman c. 16x), I am only seeing fair value at this stage.
With execution risks, and a “show me” setup.
Or from a risk and reward view, there is no margin of safety. Very robust growth is needed to justify these current multiples, despite the huge drops in share prices.
This perfectly illustrates how big the bubble before was.
I marked the area with a market cap to free cash flow of > 30x (i.e. ignoring debt).
Brown-Forman practically most of the time had such excessive multiples, while Diageo and Pernod Ricard briefly reached this level at their respective tops.
Before, multiples between 20–30x were the norm — but these companies were growing.
I continue watching, and as of now, waiting for the strategic update of Diageo.
Conclusion
Stocks of spirits makers have taken a big hit.
The volume bleeding in the businesses continues, but under the hood something is changing.
Although it could finally be the long-awaited strategic shift, I remain cautious.
Important disclaimer: All content is for information, educational, and entertainment purposes only and does not constitute personal investment recommendations or advice, but the sole personal, highly subjective opinion of the author.
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