Diageo (LSE:DGE) is one of my favourite FTSE 100 stocks. Over the last couple of years, I’ve been buying as the share price falls.
I’m still confident in the underlying business, but I think 2025 is shaping up to be a real test for the company. And it could go one of two ways.
Brand power
A key part of Diageo’s strength is the power of its brands – it has leading products in categories like scotch, vodka, and gin. And this gives the firm an advantage over its competitors.
Over the last couple of years, however, the stock has been falling due to difficulties beyond the company’s control. Macroeconomic challenges have been a big part of the issue.
The US has been especially tough. I see Diageo’s leading position there as a long-term strength, but it hasn’t been this way in 2024, with demand faltering across its products.
Despite this, the biggest test might be yet to come. The threat of 20% (or 25%) tariffs on some of its products in 2025 could – I think – be the ultimate test of Diageo’s brand strength.
The ultimate test
If the prospect of tariffs on imported spirits materialises, Diageo will find itself faced with higher costs. The question is what it decides to do about these – and what happens as a result.
One option is to try and pass these on to wholesalers by raising prices. The risk with this strategy in an industry where switching costs are non-existent is customers might just go away.
I think this will be a big test for Diageo. The point of having strong brands is that it reduces the need to compete on price because people want that specific product, even if it’s more expensive.
I don’t expect the company to be able to pass through a 20% cost increase in 2025 without sales volumes falling away. But I do expect it to be able to do something.
Make-or-break time
I see this as make-or-break time for Diageo. The firm has to show its brand strength allows it to increase prices without giving away significant market share to competitors.
Doing this successfully will amount to a big show of strength. And I think it would also be an indication that the falling share price is an opportunity to buy shares in a quality business.
If it can’t do this, however, a significant part of what I take to be the reason for owning the stock falls away. And that would make me reconsider my investment in the company.
To reiterate: I’m not expecting Diageo to be able to increase prices by 20% (or any eventual tariff amount). But I am looking for the firm to be able to reduce the impact of import tariffs to at least some degree.
Bring on 2025
Tariffs are an unwelcome obstacle for Diageo. Scotch whisky can only be produced in Scotland, so there’s no way to avoid the import taxes if they emerge.
Part of my reason for buying the stock, however, was that the company has the ability to rise to challenges like this. I’ll be watching closely in 2025 to see if it can deliver.
This post was originally published on Motley Fool
