Diageo's new CEO needs actions, not just words
But whoever takes on the full-time leadership of the world's top spirits maker will inherit challenges that will take more than words to address.
Diageo announced Debra Crew was stepping down with immediate effect on Wednesday after just two years leading the company - a period in which its shares fell 44% amid a sector-wide downturn.
Four investors, including one top 20 shareholder, told Reuters that Jhangiani, who joined Diageo as chief financial officer in September, would make a solid permanent CEO of the Johnnie Walker whisky and Don Julio tequila maker.
Still, some of those shareholders cautioned, whoever takes the job permanently must cut Diageo's debt and revive growth at a time when consumers' wallets are stretched and the sector faces tariff hikes in the United States, its biggest market.
At the same time, competition from alcohol alternatives like cannabis drinks is rising, some consumers are cutting back altogether and public health authorities are increasingly raising the alarm about alcohol's health risks.
"We can't just hope for the best here," said Kai Lehmann, senior analyst at Flossbach von Storch, the top 20 shareholder, adding investors had criticised Crew for passivity and that belief in her plans to generate growth had waned.
"The new CEO must immediately set about sharpening the portfolio and divesting categories and brands with no growth potential."
Diageo's fortunes have turned dramatically since Crew's appointment in June 2023 after the sudden death of predecessor Ivan Menezes.
Menezes presided over a period of extraordinary growth for the industry as drinkers splurged on spirits after the COVID-19 pandemic, a trend that would later reverse amid high interest rates and inflation, sending industry sales spiralling.
Decisions made during those high times, including to significantly increase Diageo's debt and set ambitious targets for future growth, complicated life for Crew and for the company. The new CEO inherits these challenges.
Diageo declined to comment.
Crew did make some changes during her short tenure, including investing in Diageo's U.S. distribution, and despite the slide, the company's stock has performed relatively well versus peers. Not all investors were unhappy.
But a November 2023 profit warning dented confidence in Crew from the outset, and it never fully recovered, Lehmann and five other investors said.
Jhangiani, in contrast, joined in 2024 as a familiar and trusted figure thanks to his work at Coca-Cola bottlers.
He quickly became the face of Diageo's turnaround, scrapping Menezes' ambitious sales targets and launching a plan to cut costs and sell assets to reduce the company's debt ratio.
"They both said the right things," Chris Beckett, analyst at Diageo investor Quilter Cheviot said of Crew and Jhangiani. "But...it was always at the back of the mind, who was really running the company?"
Whoever takes over, Diageo must communicate a convincing plan for growth, Beckett, Lehmann and two other investors said.
Diageo, at least, is a company "with a problem, not a crisis", said Steve Clayton, portfolio manager at Hargreaves Lansdown, adding that it remained financially strong.
Leverage has, however, crept above Diageo's target range to stand at 3.1 times operating profit at the end of 2024.
Diageo's debts have doubled since 2017, driven in large part by $13 billion worth of share buybacks over the period, according to Fintan Ryan, analyst at Goodbody.
That included extensive buybacks during the industry's boom in 2022 and in 2023, when shares were on average 40% more expensive than they are currently, Lehmann said.
The strategy left Diageo looking to sell assets in a tough environment when it might get a worse price, said Michael Laskin, a senior fixed income analyst at Diageo shareholder Columbia Threadneedle.
Laskin said Diageo failed to see the sharp drop in consumption coming and instead built up debts that now exacerbate its problems.
These decisions were, in hindsight, a "lesson in poor capital allocation" that cost investors and makes the CEO's life harder today, Lehmann said.
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