Diageo hangover worsens as shares downgraded

Johnnie Walker Red Label Scotch Whisky. Photo: Newscast/Universal Images Group via Getty Images.

An even longer hangover has been forecast for Diageo (LSE:DGE) shareholders after a City bank removed its Buy stance and switched support to brewer Carlsberg.

UBS’ beverages team also favours Heineken NV (EURONEXT:HEIA) and Anheuser-Busch InBev SA/NV (EURONEXT:ABI) amid expectations the big three European brewers will return to volume growth in the first part of next year.

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In contrast, the bank forecasts another year of decline in the US spirits industry as volumes suffer due to lower frequency of consumption and downtrading adds to pricing pressure.

Alongside the downgrade of Diageo from Buy to Neutral, Remy Cointreau (EURONEXT:RCO) has been cut to Sell and Pernod Ricard SA (EURONEXT:RI) and Davide Campari-Milano NV Az nom Post Frazionamento (MTA:CPR) kept as Neutral rated.

The overall European beverages sector currently languishes at a 30% discount to the wider food and household goods industry, reflecting another year of topline downgrades.

However, UBS believes that the market fails to differentiate between the short-term cyclical headwinds affecting brewers in emerging markets and the structural ones impacting the spirits industry in the US and China.

It said: “Looking out to 2026, we expect the brewers to return to volume growth led by emerging markets, where more of the headwinds in 2025 were short-term cyclical/weather related.

“However, we are more cautious on spirits due to persistent US/China industry weakness where the challenge is partly cyclical but also structural.”

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UBS expects that the US spirits industry, which accounts for about 30% of Diageo sales, will record a 3.5% volume decline next year. It adds that Diageo’s tequila portfolio is losing share in a declining category, with the previous engine driver of Don Julio now a headwind.

The weakness could prompt Diageo to pull levers to realise value, such as the disposal of non-core assets including its stake in cricket’s IPL 2025 champions Royal Challengers Bengaluru or its interest in Chinese baijiu.

Speculation has also focused on a potential spin-off or initial public offering of Guinness, although UBS believes this is unlikely in the near term given the need for clarity from incoming chief executive Dave Lewis on the company’s strategic direction.

Diageo shares have underperformed the sector by 32% so far in 2025, having fallen from 2,555p in early January to 1,680p last month. They stood at 1,737p in today’s session, representing a valuation multiple of 14 times earnings and approximate 20% discount to staples peers.

UBS said: “We expect this discount to persist until US spirits recover or portfolio restructuring materialises.” 

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The upgrade for Carlsberg follows the creation of a multi-beverage portfolio, with January’s acquisition of Britvic meaning soft drinks now account for 30% of volumes.

The bank said: “Carlsberg’s foray into a structurally faster-growth soft drinks category in Europe comes at a time when there are also some green shoots for its beer business in Asia after two years of volume declines.”

It is encouraged by a step up of sales and marketing spend in China, which has boosted hopes for a return to market share gains and low-single digit volume growth in the country.

The bank added: “A return to consistent volume growth and de-leveraging should support a re-rating closer to European staples peers.”

Graeme Evans owns Diageo shares.