People have reduced their alcohol consumption, and although liquor companies want you to drink responsibly, they want you to drink responsibly…more often.
Alcohol sales have fallen since their peak during the Covid pandemic, the uncertain state of the economy and inflation have led consumers to reduce their spending, and now tariffs have become yet another factor affecting the alcohol industry.
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President Trump implemented new tariffs on products imported into the U.S. from many countries in April, including an additional 10% baseline tariff. A few days later, he announced a 90-day pause on “reciprocal” duties for many countries except China.
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However, the U.S. and China recently agreed to decrease baseline duties to 10% and remove most retaliatory levies for 90 days, giving them time to discuss a more long-term solution.
Although the tariffs still threaten the economic future of many companies, those heavily dependent on foreign imports to continue business in the U.S. face the highest risk.
Diageo warns consumers about tariffs during an earnings call.
Image source: Mitchell/Getty Images
Diageo makes a huge move as the trade war heats up
Diageo (DEO) previously stated that it had taken action over the last few months since Trump’s tariff announcement to mitigate the potential impact by readjusting pricing, reanalyzing promotion and inventory management strategies, optimizing the supply chain, and relocating investments.
This massive shift caused Diageo to withdraw its mid-term guidance amid the geopolitical and macroeconomic uncertainty in its key market sectors. Still, the company promised to provide frequent performance updates to keep investors updated.
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Diageo heavily depends on imports. Since all its top brands are shipped from overseas, it has no choice but to face tariffs.
Fortunately, its Canadian and Mexican imported products, which include Crown Royal and Don Julio Tequila, comprise around 50% of U.S. sales and remain exempt from tariffs.
However, the Johnnie Walker, Guinness, and Bailey brands are all imported from the UK and Europe and are still subject to a 10% tariff.
Diageo enacts a plan to mitigate tariff impact
Diageo warned during its latest earnings call that it expects the U.S. import tariffs to have an annual impact of around $150 million on its business.
To mitigate the effects, it plans to enact its Accelerate Program, a cost-cutting initiative that will help it save $500 million over the next three years and enable reinvestment in future growth.
However, this initiative will only absorb around half of the impact through leveraging inventory management, supply chain optimization, and cost management, some of which the company has already enacted or is working on.
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The company also said this cost reduction would be supported by “appropriate and selective disposals” over the next few years, but didn’t elaborate.
This could suggest that more cuts will be announced in the upcoming months or that one of its assets could be sold in the future. However, Diageo has not confirmed the sale of any brand.
Although tariffs continue evolving, the company expects to deliver around $3 billion of free cash flow annually from fiscal 2026, which it hopes will increase as performance improves.
“Going forward, we would look to mitigate fully the tariffs, and this is where we have a long track record of managing international tariffs, giving us confidence that we can do this successfully,” said Diageo CEO Debra Crew.
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