Even Diageo's cocktail of brands won't guarantee heady profits in a pandemic

Looking into the bottom of the glass as another evening draws to an end in an interminable winter lockdown, it may be tempting to believe the amount we drink has gone up. What else is there to do? Yet the experience of Diageo, maker of brands from Guinness to Johnnie Walker whisky and Smirnoff vodka, suggests something quite different: even if home drinking has picked up, the industry is missing the social drinker.

The closure of pubs, bars and restaurants has forced alcohol companies into an abrupt rethink, as the balance shifts away from social venues and towards drinks bought for the home at off-licences or, increasingly, online. At its interim results on Thursday, Diageo will give further indications of whether home drinkers made up for a Christmas somewhat lacking in festive spirits.

City forecasters expect revenues of £6.2bn for the second half of 2020, a near-£1bn hit compared with the previous year. That would represent a costly loss of trade but an improvement on a first half dominated by the start of the pandemic. Diageo’s sales fell by 23% in the first half of 2020, whereas the expected drop for the latest six months, to the end of December, is about 14%.

The off-licence trade had remained robust, Diageo told the market in an update last September. A lot has changed since then as the pandemic’s second wave struck Europe, but investors will be hoping sales in the US – where restrictions are not uniform – will have been resilient, and that big banqueting occasions will help the recovery in China, which has controlled the virus more effectively.

Diageo is at heart a financial construct. It lacks the romanticism of its brands by design: the company’s soulless corporate identity was created in 1997 after the merger of Guinness and Grand Metropolitan, deliberately playing up “everyday” mundanity. Diageo is just a portfolio of much livelier brands, with attendant cost savings and the benefits of diversification. If an unlikely gin craze sweeps the world, it can benefit; if tequila booms, it is ready and waiting. And if consumers want drinks without the hangover it will invest in “no- and low-alcohol” as well – notwithstanding the embarrassing safety recall of its Guinness 0.0 drink shortly after launch.

Analysts at Bank of America suggest that the results will show that Diageo is well-placed among rivals, given the underperformance of shares that are down by about 9% since the start of 2020. They cite an enticing cocktail of steady growth in the US and a faster recovery in poorer countries and even in Europe. At the same time the Brexit deal removes currency uncertainty.

Diageo has other attractions: investors will be keeping a beady eye on its dividend. A 2% increase for the last fiscal year maintained a growth streak that stretches back to 1999, according to Russ Mould of investing platform AJ Bell.

Yet the global nature of the pandemic has undermined the strength of Diageo’s basket of brands, its geographical diversity and its financial firepower. Diageo shareholders are (like everyone else) nervously watching the distribution of vaccines as they savour the prospect of free-spending drinkers back in pubs and bars.

Sales will surely bounce back if vaccines are administered widely in its main markets, but a resurgence of the virus (or the much bleaker prospect of further new variants resistant to vaccines) might be costly. Whatever the merits of online booze shopping or at-home cocktails, the most important determinant of Diageo’s fortunes remains out of its control.