The reprieve from Washington’s tariff threats, particularly on tequila and Canadian whisky, offered Diageo a welcome twist. Nearly half of its American sales depend on spirits born in Mexico or Canada, notably Don Julio and Crown Royal. A previously anticipated 25% levy did not materialise, allowing Diageo to ship faster. That urgency is reflected in a 5.9% organic sales boost in the third quarter, aided by a tactical push to frontload shipments before tariffs could bite. But the company admits the bump is fleeting: the fourth quarter may well feel the recoil.

Chief executive Debra Crew, who took the helm last year, is now trying to steer Diageo back onto a smoother path. Her ambition: to generate $3 billion in free cash flow annually by fiscal 2026, enough to shore up the balance sheet and reassure investors grown restless amid falling volumes in key markets. “This plan will ensure we are well-positioned to deliver sustainable, consistent performance while maximising shareholder returns—even if current trading conditions persist,” she said, signalling no expectation of a quick return to pre-pandemic buoyancy.

Levered Cash Flow

The $500 million in savings, expected by 2028, will not come from the bottom of the bottle. Diageo is eyeing supply-chain efficiencies, reductions in discretionary spending, and further digitalisation across its sprawling operations. Behind the scenes, the company is also quietly trimming headcount and simplifying its brand portfolio—moves meant to sharpen focus on higher-margin labels.

The challenge is that Diageo’s pain is not only political but structural. Changing drinking habits, particularly among younger consumers in Europe and North America, have eroded demand for premium spirits. Meanwhile, inflation continues to squeeze household budgets, making that $60 bottle of Don Julio a more occasional indulgence. Growth in emerging markets, once the company’s golden ticket, has also been patchy.

Diageo’s third-quarter results offered cautious optimism. The 5.9% gain in organic net sales was well above Bloomberg’s consensus estimate of 2.9%, driven by a 2.8% increase in organic volume. Total net sales reached $4.38 billion, reflecting a 2.9% year-on-year increase and surpassing expectations. North America led the growth with a 6% rise to $1.90 billion, boosted by strategic shipment acceleration ahead of potential tariffs. However, performance was mixed across regions: Europe contracted by 1.3%, and Africa fell by 4.2%, while Latin America and the Caribbean surged 13%, and Asia Pacific remained broadly flat. Despite regional headwinds, Diageo reiterated its full-year guidance and confirmed it continues to expect capital expenditure at the upper end of its $1.3–$1.5 billion range. The firm also reiterated its view that U.S.–China trade tensions are immaterial to its business and that the estimated $150 million annualised impact from U.S. tariffs—assuming no further changes to existing duties—has already been incorporated into forecasts for fiscal 2025 and 2026. Notably, Diageo expects to offset roughly half of this impact through operational efficiencies. A sequential improvement in second-half sales is also anticipated.

Diageo’s results are “all good,” wrote RBC Capital Markets analyst James Edwardes Jones. However, he added that while the third-quarter organic sales growth number is “eye-catching,” some of it came from phasing that’s set to reverse in its fourth quarter.

Still, Diageo has form in resilience. It weathered Brexit, supply shocks, and the collapse of bar culture during the pandemic. With its global footprint and stable of blue-chip brands, it remains the heavyweight of the industry. Investors, while cautious, may take heart from the more modest tariff impact and Crew’s resolve to tighten the screws.

Much now hinges on execution. If the company can deliver on its savings pledge without diluting its brand magic, the toast might yet be to a comeback.