How Tariffs Could Impact Your Favorite Spirits: Insights from Don Julio's Maker
Discover how Diageo, the producer of iconic spirits like Don Julio tequila and Crown Royal whiskey, plans to navigate new tariffs without solely relying on price hikes, amid changing consumer habits and economic challenges.
Key Insights
- During the previous tariff phase under President Trump, Diageo passed all additional costs directly to consumers, according to CEO Debra Ann Crew.
- Facing proposed tariffs on Mexican and Canadian imports, the company aims to diversify its strategy beyond price increases.
- With consumer demand softening, Diageo is prioritizing other mitigation tactics before adjusting prices.
Diageo, known for Don Julio tequila and Crown Royal Canadian whiskey, previously managed tariff impacts by raising prices entirely. However, CEO Debra Ann Crew emphasized a more cautious, multi-pronged approach this time, considering careful consumer spending patterns.
"Previously, we absorbed tariffs by increasing prices 100%, but now we have more options to mitigate these costs," Crew shared during a recent earnings call.
The proposed tariffs on goods from Mexico and Canada could reduce Diageo's profits by approximately $200 million, with nearly half of its U.S. sales—especially tequila products—originating from these countries.
Chief Financial Officer Manik Jhangiani highlighted that about $80 million of this impact could be softened through advance bottle imports and optimizing supply chains. This strategy allows Diageo, which also owns Johnnie Walker, Guinness, and Smirnoff, to carefully consider price changes in a market where alcohol consumption is declining.
"Price increases are not our immediate response; we are closely monitoring consumer trends and competitor actions," Jhangiani noted.
Consumer Caution and Shifting Preferences Affect Alcohol Sales
Diageo experienced a decline in alcohol volume sales in the latter half of last year. Crew attributed this to consumer fatigue from rising grocery costs and higher borrowing expenses.
Additionally, evolving cultural attitudes and health concerns are encouraging Americans to reduce alcohol intake. Market research from NielsenIQ showed a 1.1% drop in alcohol sales at major retailers and convenience stores in December year-over-year, while non-alcoholic beverage sales surged by over 27%.
In a related development, the U.S. Surgeon General recently proposed updating alcohol warning labels to include cancer risk information, pending Congressional approval.
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