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Tesco and Diageo (LSE:DGE) shares both fall within the broad consumer staples sector. Companies here make or sell essential goods that people continue to buy regardless of economic conditions, meaning sales tend to remain steady.
But try telling that to long-term investors in Diageo, who have suffered a 55% share price crash over the past five years. Turns out, some people don’t continue buying premium alcohol brands regardless of economic conditions. Some just can’t afford to, and alcohol is ultimately a discretionary category.
Tesco, by contrast, sells something people can’t really do without: food. Hence why the blue-blooded defensive consumer stock is up 85% in three years, despite the cost-of-living crisis.
This included a 5.5% rise yesterday (8 October) after the firm reported a strong first half. But Tesco’s CEO told reporters something that could spell more bad news for Diageo shareholders…
What did Ken say?
Chief executive Ken Murphy said this: “I do think it could be a marginally healthier Christmas…There might be a more moderate Christmas from an alcohol point of view“.
Now, this trend is not new, as Diageo has noted that Gen Z are drinking alcohol differently from previous generations. However, to hear the boss of the UK’s largest supermarket confirm that consumers are moderating alcohol consumption – and even probably around Christmas! – is not exactly encouraging news for Smirnoff maker Diageo.
Murphy said GLP-1 weight-loss drugs like Wegovy and Mounjaro are playing a part, but they’re not the only catalyst. So this tends to reinforce the idea that there’s a generational shift towards healthier living, and away from drinking alcohol.
Stepping back then, there are three big drivers impacting Diageo’s sales:
- Inflation and the high cost of living (less disposable income for nights out).
- A broad shift towards moderation and healthier lifestyles.
- GLP-1 medications (including new daily weight-loss tablets).
All is not lost
Now, Murphy did offer Diageo shareholders a silver lining, saying that he expected to see strong growth in low- and no-alcohol categories.
The good news is that Diageo is increasingly well positioned here. It already has some established ready-to-drink (RTD) offerings, including Smirnoff Ice and Gordon’s Gin & Tonic. But the firm is expanding its RTD canned cocktail range and ramping up alcohol-free options like Guinness 0.0 and Gordon’s 0.0.
Make no mistake, Diageo will be busy getting plenty of its low- and no-alcohol options on supermarket shelves this Christmas. It’s a category the company has largely turned its nose up at in the past, but not anymore.
Looking ahead, the Tesco boss still expects most UK consumers to let their hair down at Christmas. “Customers do love to indulge,” he reminded everyone.
Indeed. I indulge in Baileys at Christmas, and I suspect Diageo’s top-selling liqueur brand will remain a festive favourite for decades to come.
Am I worried?
As a Diageo shareholder, I’m not particularly surprised by what Tesco said. Nor am I worried, as the shares are trading at 12 times next year’s forecast earnings. At this low valuation, I suspect much of the pessimism is already priced in.
And with Diageo cutting costs and attempting to sharpen its competitive edge under new management, I think a turnaround is more likely than not. It will take time, though. So investors should only consider this stock if they’re willing to be patient.
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Ben McPoland owns shares in Diageo.
This story originally appeared on Motley Fool
