Overview: Diageo has revealed a strategy to slash costs by approximately $1 billion over the next three years in an effort to revive company fortunes. The announcement follows a reported operating profit of $3.156bn for the year ended June 30, representing a 27.2% decrease.
The Full Story
CEO Dave Lewis, known as ‘Drastic Dave’, has embarked on a major exercise to revamp Diageo’s operating framework and streamline the supply chain. The cost-cutting measures are a direct response to over-stocking in Latin America and the Caribbean, tariffs, and weak demand in the US and China. Additionally, societal change has dampened demand, with younger adults drinking less and the rise of weight-loss drugs affecting consumption.
The company reported an operating profit of $3.156bn for the year ended June 30, a better result than the City had expected despite the decline. True to form, Sir Dave wasted no time in cutting the interim dividend in half in February. The FTSE-100 veteran has certainly had a tricky period over recent years, having found itself fighting fires on a host of fronts.
Brand & Industry History
Diageo is the custodian of some of the world’s most famous drinks brands, including Johnnie Walker, Guinness, and Smirnoff. Since Sir Dave Lewis took charge in January, speculation mounted that the Scotch whisky giant was preparing for a major cost-cutting drive. City watchers largely applauded the appointment of Sir Dave as a safe pair of hands who would also be unafraid to cut costs – as his previous spells at Tesco and Unilever underlined.
What This Means
This restructuring will not come without some pain being inflicted across the workforce, and not least in Scotland. Some 172 jobs at Diageo distilleries in areas such as Speyside and Islay are at risk of redundancy as part of the drive to “redesign our operating framework”. This underlines the human impact of business decisions that benefit shareholders and improve the bottom line while bringing the risk of unemployment to parts of the workforce.
The rise today in the company’s shares, which have been in steady decline for the last four years, indicates the City looks to have given its seal of approval to the plan. However, it is unfortunate given the important role Diageo’s Scotch whisky distilleries play in the economic life of rural communities in Scotland.
Consumer Takeaway
This news offers context regarding the stability of the brands mentioned, including Johnnie Walker and Smirnoff, amidst significant operational changes. The restructuring impacts the production footprint in key regions like Speyside and Islay, which are vital to the economic life of rural communities in Scotland.
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