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If you\u2019ve ordered a pint of Guinness in London lately, you\u2019ll have noticed that it wasn\u2019t cheap. But while the black stuff costs a pretty penny, the stout\u2019s brewer, Diageo (LSE: DGE), looks a lot like a value share.<\/p>\n
It has a proven business model yet has lost a quarter of its price in the past 12 months alone.<\/p>\n
This week saw Diageo\u2019s new boss talk about fixing challenges including that of getting hold of a Guinness in London. He was focussed on product availability. But he\u2019s also got price in mind too, with plans to make the company\u2019s offering more competitive.<\/p>\n
As a lover of the black stuff, that sounds good to me. As a Diageo shareholder, though, I am deeply concerned about what it means.<\/p>\n
Why? In a nutshell: pricing power.<\/p>\n
Look at Diageo\u2019s portfolio and what stands out is not just how iconic many of it brands are, but also how costly some of them can be.<\/p>\n
Sure, there are some cheaper names like Johnnie Walker Red Label and Smirnoff Ice. But there are a lot of costly tipples too, such as Johnnie Walker Blue Label.<\/p>\n
With demand for high-end white spirits struggling over the past couple of years, Diageo\u2019s business has suffered.<\/p>\n
But the combination of a falling share price and unique, high-quality brand portfolio has made it look like a value share. I\u2019ve stocked up (on Diageo shares, not Blue Label).<\/p>\n
However, making the company more competitive on price could mean it ends up being a value trap, if it damages Diageo\u2019s pricing power.<\/p>\n
That pricing power has been nurtured over decades, but is fragile. Once you slash selling costs, even if sales volumes grow, profit margins can suffer \u2013 and the pricing power that took decades to build can be permanently destroyed.<\/p>\n
Frankly, that risk concerns me a lot. And, combined with a dividend cut, I seriously weighed selling my Diageo shares following this week\u2019s news. They remain well below what I paid for them, though, and on reflection I decided to hang on for now.<\/p>\n
After all, Diageo\u2019s asset base really is fantastic: not just the brands, but unique production facilities too.<\/p>\n
Plus, the dividend cut and aim to become more price competitive could actually turn out to be the right move. Diageo has had a challenging couple of years and its new boss has been brought in by the board with the aim of turning it around.<\/p>\n
He is in the hotseat; I am not. He may understand the market and Diageo\u2019s challenges far better than I do.<\/p>\n
If so, the currently lacklustre Diageo share price could end up offering significant value.<\/p>\n
Still, I remain sceptical. Time will tell whether a sharper focus on costs pays for itself in terms of higher sales volumes. That looks like a tricky feat to achieve in a market where alcohol demand generally is in structural decline.<\/p>\n
A massive dividend cut \u2013 Diageo plans to halve its payout \u2013 is rarely good news in my experience, as it suggests a business with deep problems.<\/p>\n
The next couple of years will show whether the firm\u2019s woes are fixable \u2013 and whether today\u2019s share price ultimately turns out to be a long-term bargain.<\/p>\n
The post Down 25% in a year, here\u2019s why the Guinness brewer might not be the value share it looks like<\/a> appeared first on The Motley Fool UK<\/a>.<\/p>\n More reading<\/p>\n C Ruane has positions in Diageo Plc. The Motley Fool UK has recommended Diageo Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.<\/a><\/p>\n Motley Fool UK 2026<\/p>\n","protected":false},"excerpt":{"rendered":"Image source: Getty Images If you\u2019ve ordered a pint of Guinness in London lately, you\u2019ll have noticed that…\n","protected":false},"author":2,"featured_media":322657,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[5],"tags":[149914,72,6424,61,60,149913,149912,96767,53505],"class_list":["post-322656","post","type-post","status-publish","format-standard","has-post-thumbnail","category-business","tag-blue-label","tag-business","tag-diageo","tag-ie","tag-ireland","tag-johnnie-walker-red-label","tag-pint-of-guinness","tag-pricing-power","tag-share-price"],"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/ie\/wp-json\/wp\/v2\/posts\/322656","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/ie\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/ie\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/ie\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/ie\/wp-json\/wp\/v2\/comments?post=322656"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/ie\/wp-json\/wp\/v2\/posts\/322656\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/ie\/wp-json\/wp\/v2\/media\/322657"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/ie\/wp-json\/wp\/v2\/media?parent=322656"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/ie\/wp-json\/wp\/v2\/categories?post=322656"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/ie\/wp-json\/wp\/v2\/tags?post=322656"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}