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The Diageo (LSE:DGE) share price just keeps going lower at the moment. It’s as if someone has told it the story of Jules Verne’s Journey to the Centre of the Earth and the stock thought “sounds like a plan…”.
One of the biggest concerns is Glucagon-like Peptide-1 (GLP-1) drugs that help reverse the effects of diabetes and help combat obesity. And unlike a number of purported innovations – they actually work.
It turns out though, that GLP-1 drugs aren’t just good for helping people lose weight. They’re also doing a decent job of knocking pounds off the FTSE 100 drinks company’s market cap.
As a result, Terry Smith has been selling his stake in Diageo, citing concerns about the impact of GLP-1 drugs on the drinks industry as a whole. But is this all just a big overreaction?
How big is the problem?
Gauging the scale of the threat precisely is impossible, but investors can give themselves a rough idea. In 2024, Diageo generated 30% of its sales from the US, where the obesity rate is around 40%.
GLP-1 drugs are expensive and it looks as though only 50% of the people that might be eligible for them will be able to access them. And there’s a further unknown about how many will stick with it.
The effects wear off if the drugs aren’t taken every day. And with potential side-effects including nausea, sickness, and dizziness, there might well be some who find it difficult to keep taking them.
Lastly, there’s an important issue of demographics. While Diageo doesn’t publish demographic data explicitly, market studies indicate that around two-thirds of its customers are male.
That matters because around men only account for around a third of the people currently using GLP-1 drugs for weight loss. Given all this, I think rumours of this company’s demise are greatly exaggerated.
Risks and uncertainties
Based on these numbers, the impact on Diageo’s top line might be fairly limited. In a pretty optimistic scenario, the impact on revenues could be as low as 1.2% – or 4% of US sales.
There’s a lot behind these numbers for investors to think about. For example, the firm typically earns strong margins in the US so a 1.2% hit to sales might translate into a bigger reduction in profits.
Another issue is whether people on GLP-1s are those who spend more on Diageo’s products. If they do, then losing that part of the customer base might result in a disproportionate reduction in revenues.
All this is to say that no investor should be dismissing the risk of weight-loss drugs entirely when it comes to Diageo shares. And they should absolutely not be counting on the above numbers as accurate.
I think a precise picture of the threat is impossible to construct at the moment. But I don’t think this justifies the sell-off in the stock, which is why I’m still looking to buy Diageo shares right now.
