Diageo’s new chief executive has unveiled plans to nearly double Guinness production while hacking back a “significant” proportion of its 30,000-strong workforce, in a strategic overhaul worthy of his nickname, “Drastic” Dave Lewis.
Shares in Diageo bounced on Thursday, as the former Tesco boss faced down the first big test of his initial half-year in the job, after being parachuted in last November to revive the flagging fortunes of the UK-based drinks company.
Speaking after the company announced a decline in sales but slightly better-than-expected operating profit, Lewis said his turnaround plan would involve job cuts, adding that the “consequences of that are not great for anybody”.
But he added: “Nobody [inside the company] is saying to me that this is the wrong thing to do.”
Lewis declined to give a figure for the expected reduction in the worldwide headcount.
However, Diageo has told investors that it expects to incur $514m (£382m) in charges relating to employee severance and Lewis said he had discovered “massive” duplication in roles since becoming CEO.
Lewis, who earned the “Drastic Dave” moniker in the City for his cost-cutting zeal, promised to deliver $1bn of annual savings over two years through a restructuring that would cost $1.2bn and was aimed at making the company more agile.
While this will involve slashing jobs, Lewis vowed to harness the seemingly unstoppable popularity of Guinness around the world.
A $1bn investment in the brand is aimed at increasing global sales, particularly in North America, and helping the company avoid a repeat of shortages reported in the UK in recent years, including during the important festive period.
“We’re going to double the capacity of Guinness during the course of this plan [by 2031],” said Lewis, adding that the future of the brand was “very bright”.
Production capacity is slated to increase from 8.2m hectolitres (mHL) today to 15.7m by 2031, an increase equivalent to 300 Olympic-sized swimming pools of the black stuff a year.
In the months after his appointment, some City pundits speculated that he might take the radical step of selling Guinness to raise up to £8bn. The company moved quickly to quash any suggestion of selling its best-performing big brand.
Diageo was not actively seeking to sell less well-performing brands, Lewis said.
In the past decade, the company has focused on “premiumisation”, banking on discerning drinkers choosing upmarket brands. That strategy has left Diageo with an overloaded stable of more expensive labels, just as cash-strapped consumers stopped drinking from the top shelf.
Lewis said Diageo would not be “hawking our brands” and was not looking to buy assets either, but would focus more on a broader portfolio, including mid-market brands and smaller-pack sizes that were likely to suit cost-conscious drinkers.
He also promised to amend Diageo’s failure to cash in on the so-called ready-to-drink category, such as premade cocktails or “gin in a tin”. “We’re just going to roll our sleeves up and get on with our own business,” Lewis added.
skip past newsletter promotionFree newsletter | Every weekday
Sign up to Business Today
Get set for the working day – we’ll point you to all the business news and analysis you need every morning
after newsletter promotion
Shares in Diageo rose by more than 6% in afternoon trading after the release, indicating early contentment among investors with the early fruit of the turnaround plan.
Lewis’s appointment was announced last November after a lacklustre period under his immediate predecessor, Debra Crew, a former captain in US military intelligence who took over after the sudden death of the longtime chief executive Sir Ivan Menezes.
The global purveyor of brands such as Johnnie Walker and Smirnoff had thrived in the period immediately after the Covid-19 pandemic, but fell out of favour with investors as Crew’s tenure was tainted by strategic errors and a surprise profits warning, leading to her exit.
Diageo’s share price jumped last year after the arrival of Lewis, who came with a reputation built during five years in charge of Tesco and nearly three decades at the global household brands company Unilever.
But investors punished Diageo in February after he slashed the dividend and reported weak demand in the US and China, eroding some of the market gains.
On Thursday, the company said annual pre-tax profit fell by 26%, from $3.5bn to $2.6bn, including $900m one-off charges related to Lewis’s restructuring of the business and a $1.5bn hit from its Turkish business.
Without the one-off impact and other charges such as debt interest, operating profit was slightly ahead of analysts’ forecasts at $5.7bn.
Sales were down by 2% to $19.6bn amid continued weakness in China and the US. Lewis said he expects the North American business, Diageo’s largest region by revenue, to take two years to return to growth.
The annual dividend remains at $0.50 a share, slightly less than half the level before Lewis slashed the payout to fund his turnaround strategy.
