Diageo plc could be severely impacted by an escalating trade war in North America, as the market is currently its biggest source of net sales.
UK drinks maker Diageo plc announced its financial year 2025 interim results for the half year ended 31 December 2024 on Tuesday, taking back its medium-term sales guidance amid increasing US tariff uncertainty.
The company has revealed that if the tariffs threatened by US president Donald Trump against Canada and Mexico come into effect, its profits could plunge by about $200 million (€193.7m) in the second half of 2025.
Diageo plc’s share price dropped 1.3% on Tuesday afternoon.
The company owns more than 200 brands, including Guinness, Johnnie Walker, Bailey’s and Captain Morgan, with sales in almost 180 countries
Currently, Diageo exports whiskey from Canada and tequila from Mexico, into the US, which is one of its key markets. The North American market is Diageo’s biggest source of net sales, while also accounting for the largest share of the spirits market, in terms of volume.
As such, any tariffs by the US on either Canada or Mexico could prove to have far-reaching consequences for Diageo.
Trump’s 25% tariffs against Canada and Mexico, which were supposed to be implemented on Tuesday, have now been delayed by a month. This is following talks with Canadian prime minister Justin Trudeau and Mexican president Claudia Sheinbaum.
Previously, the company had a medium-term organic sales growth target of between 5% to 7%, which has now been removed amid rising fears of a global trade war, which has impacted recovery rates in several of its key markets.
Diageo also highlighted that the possibility of future developments has made it more difficult to provide updated guidance regarding this target.
However, it reassured investors that it would be sharing more regular trading updates and near-term guidance in the meantime.
Diageo reports lacklustre fourth quarter results
Reported net sales came up to $10.9 billion (€10.6bn), which was a decrease of 0.6%, mainly because of a challenging foreign exchange market. However, organic net sales inched up 1% to $101m (€97.8m), although a fall in volumes capped gains somewhat.
Reported operating profit dropped 4.9%, also affected by unfavourable foreign exchange situations, while organic operating profit dipped 1.2%.
Earnings per share (EPS) pre-exceptionals plunged 9.6%, mainly because of weaker Moët Hennessy performance.
Diageo has been facing decreased demand for its premium brands globally, following consumers turning more towards cheaper brands, due to the ongoing cost of living crisis being seen in several markets.
Debra Crew, the chief executive officer (CEO) of Diageo plc, said in the FY25 interim earnings press release, on the company’s website: “Growth in four of our five regions was supported by market share gains. Notably, in North America, we outperformed the market with high quality share growth and positive organic net sales growth, driven by strong execution and momentum in Don Julio and Crown Royal.
“I’m also particularly proud of the performance of our iconic Guinness brand, which delivered double-digit growth for an eighth consecutive half, supported by brand building expertise, innovation and growing global momentum.While the pace of recovery has been slower in several key markets, we remain confident of favourable long-term industry fundamentals and more importantly in our ability to outperform the market.”
What the analysts think of Diageo’s results
Chris Beckett, head of research at Quilter Cheviot, said in an email note: “Diageo’s half-year results today are satisfactory and likely exceeded market expectations. We have been anticipating a stabilisation in its performance, and with sales up by 1% and profits down by 1%, this is the stabilisation we were looking for.
“The market might react negatively to the removal of the medium-term guidance of 5% to 7% organic sales growth. This target was set during the pandemic when demand was exceptionally high, making it unrealistic in the current environment. While we are not overly concerned about the removal of this guidance, it is likely to be poorly received by some.
“We do not believe there has been a fundamental decline in demand for high-quality spirits brands; rather, there has been a temporary soft patch that will recover.”
Russ Mould, investment director at AJ Bell, said in an email note: “Diageo has had precious little good news to toast so far in 2025. First the threat of having to include cancer warnings on its drinks labels emerged and now the company has withdrawn its medium-term guidance.
“It becomes one of the first companies to move beyond vaguely discussing the threat posed by US tariffs to actively talking about the impact and how it will attempt to mitigate it. Diageo imports from Mexico and Canada account for a good chunk of its US sales so it will be relieved to see the imposition of tariffs for these two countries delayed for now.
“If tariffs are eventually imposed then it will be a test of Diageo’s pricing power to pass on these extra costs to consumers. The financial results themselves weren’t outstanding, even though group revenue came in slightly ahead of forecasts. The dividend was held flat, in a sign of the uncertain outlook and big spirits brands like Tanqueray, Gordon’s and Smirnoff sales all under pressure.”