Diageo's 'Drastic Dave' targets $1 billion cost savings to confront weak growth

By Emma Rumney and Shashwat Awasthi

Aug 6 (Reuters) - Diageo's new CEO Dave Lewis unveiled a $1 billion cost-cutting plan on Thursday, saying the world's top spirits maker must adapt to a prolonged period of weak growth.

Lewis plans to use savings to invest for growth, including by reducing prices on some brands, and expanding in fast-growing areas including Guinness and canned cocktails.

Investors welcomed the overhaul as a sign that Lewis, who has been leading Diageo since January, was moving quickly to tackle years of stagnant or falling sales.

Shares in the Johnnie Walker whisky and Guinness beer maker rose as much as 11% at one point to a more than five-month high. The stock eventually closed 5.6% higher.

The spirits industry has been struggling to chart a path back to growth as people have changed what, where and how much they drink.

Lewis, nicknamed "Drastic Dave" for his history of cost-cutting at Tesco and Unilever, said his restructuring plan would change the cost structure of the entire business, and have "very significant impacts" on colleagues.

He declined to disclose the number of roles that might be affected. Big changes were focused on global, back-office functions and in areas where there was "massive duplication", he said.

Some savings would also come from cutting spending on capacity increases for growth that never materialised, Lewis said.

Diageo reported severance costs of $514 million for its fiscal year ended June 30, sharply up from $73 million a year earlier. Reuters reported in July some Diageo teams were facing up to 30% reductions.

The overhaul, saving $1 billion in costs over three years, would cost $1.2 billion, with around 70% of those costs already incurred, Diageo said. That compares with net revenues of $19.64 billion, down 3% on a year ago.

Other drinks makers have also restructured recently. Heineken said in February it would cut up to 6,000 jobs, while Pernod Ricard last year launched a plan to save €1 billion ($1.15 billion) by its fiscal 2029.

NORTH AMERICAN CHALLENGE

Diageo, which also makes Smirnoff vodka and Captain Morgan rum, forecast low-single-digit organic net sales growth through its 2029 financial year, below a previous medium-term growth target of 5% to 7% that it scrapped in 2025.

Lewis said the new guidance was shaped by weakness in its largest market, North America, which is expected to decline next year, stabilise in two years, and grow thereafter.

Sales in the region fell 8.4% in fiscal 2026, more than the 8% analysts predicted, but Lewis said he was confident he could restore performance without sacrificing profits.

Mark Nelson, analyst at Killik & Co, said Lewis had announced higher savings than expected and reassured investors that price cuts and other competitive initiatives would not require a reset in profits.

But, he said, it still wasn't clear how Diageo would deliver on its ambition to increase sales faster than the rest of the spirits market, given it has struggled to be successful in areas such as canned cocktails in the past.

"We need to be convinced," Nelson said.

(Reporting by Shashwat Awasthi in Bengaluru and Emma Rumney in London; Editing by Tomasz Janowski, Elaine Hardcastle)