Alcohol is one key European export sector that is directly exposed to US tariffs. While so far Trump has focused on China, Canada and Mexico, levies on European goods are expected soon. This has already impacted on share prices within the alcoholic beverage industry.
Current and future tariffs will increase costs for alcohol producers, adding pressure to an industry already facing a drop in demand because of healthy living trends. Inflation has also increased prices of alcohol for consumers. The latest blow comes from US Surgeon General Vivek Murthy, who is calling for cancer warning labels on alcohol similar to those on cigarettes.
Despite the challenges, some fund managers are keeping faith with the largest stocks in the sector. After some share price falls, many of these names are screening as undervalued according to Morningstar metrics.
Will Bradwell, portfolio manager of the FTF Martin Currie UK Rising Dividend Fund, which has a Morningstar Medalist Rating of Bronze, holds Diageo DGE as an overweight position in the fund at 4.24%.
Tariffs: Diageo Has Faced Them Before
Diageo, which owns a number of brands including Guinness and Don Julio, recently released first-half results showing a decline in sales volumes and predicted lower profit margins for the second half of the year.
Bradwell describes the threat of tariffs to Diageo as “fluid, but manageable”. The company has experience of dealing with tariffs in the past, then choosing to raise prices. This time around Diageo is planning to deal with tariffs through managing inventory, Bradwell says.
Still, Diageo consumers can bear an increase in prices, he adds.
“Their products are quite expensive, but they have quite a flexible consumer than can wear a bit more cost.”
Morningstar analyst Verushka Shetty also expects Diageo to take a short term hit from Trump’s tariffs as 45% of its US sales are imports from Canada and Mexico.
However, she has maintained the stock’s fair value estimate, which is above the current price.
“Diageo has a track record of successfully mitigating tariff hikes, and we don’t expect a material long-term hit. In the near term, we expect greater focus on improving cash flow and operating leverage to combat the headwind,” she says.
Terry Smith Sells His Diageo Stake
One dissenting fund manager is Fundsmith Equity’s Terry Smith, who announced in January that he was selling his stake in the alcohol beverage company after 15 years.
Smith pointed to concerns about Diageo’s new management team and the threat posed by the boom in consumption of weight-loss drugs such as Ozempic. Market leader Novo Nordisk NOVO B has already started to look at whether weight-loss drugs could also reduce alcohol consumption.
Bradwell says that this trend is a headwind for Diageo, but the company is in good shape to adapt to changes in consumer demand, as people drink less but buy better quality products.
“When you look at some of the high-end tequilas that Diageo sell there is still going to be a market for those. We have also seen [zero alcohol] Guinness 0.0 come through which has been a big product innovation for them. Those sorts of things can offset people drinking less but drinking better,” Bradwell says.
Key Morningstar Metrics For Diageo DGE
Analyst: Verushka Shetty
- Economic Moat: Wide
- Fair Value Estimate: GBX 2590.00
- Morningstar Uncertainty Rating: Low
- Sector: Consumer Defensive
- Morningstar Rating: ★★★★
- Forward Dividend Yield: 3.57%
Spirits Brands Under Pressure from Tariff Impact
James Harries, portfolio manager of the Trojan Global Income Fund, which has a Morningstar Medalist Rating of Silver, holds both Diageo and Pernod Ricard RI in the fund. However, the French spirit producer is a more recent addition to the £573 million fund at 2.42%.
Key Morningstar Metrics For Pernod Ricard RI
Analyst: Verushka Shetty
- Economic Moat: Wide
- Fair Value Estimate: EUR 129.00
- Morningstar Uncertainty Rating: Low
- Sector: Consumer Defensive
- Morningstar Rating: ★★★★
- Forward Dividend Yield: 4.59%
The two holdings have different geographical focuses: Diageo caters for the US market, while Pernod is more oriented to emerging markets, for example with whisky in India and cognac in China.
He says that spirits firms will find if tougher to mitigate the impact of tariffs. Pernod Ricard, the producer of brands such as Absolut Vodka and Havana Club rum, expects to take a £166 million hit in 2025 due to US levies on Chinese goods as well as China’s taxes on EU brandy imports, widely seen as retaliation against the EU for placing higher tariffs on Chinese EVs.
“These companies are exposed to tariffs, but almost uniquely, because with spirits you cannot move manufacturing to the US or to wherever it is that tariffs are being employed.”
Still, Harries is focusing on the long-term.
“We don’t really know what President Trump is thinking or planning. But we believe our investment in these businesses will outlast the imposition of tariffs or indeed President Trump’s presidency. We are happy to recognize that this is a risk, but it is probably largely baked into valuations.”
Is Beer a Better Bet Than Spirits?
For Michael Field, chief equity market strategist EMEA at Morningstar, 5-star stocks Heineken HEIA and Anheuser-Busch ABI are standout performers in the industry.
Key Morningstar Metrics For Anheuser-Busch InBev ABI
Analyst: Verushka Shetty
- Economic Moat: Wide
- Fair Value Estimate: EUR 83.00
- Morningstar Uncertainty Rating: Medium
- Sector: Consumer Defensive
- Morningstar Rating: ★★★★★
- Forward Dividend Yield: 1.75%
“They have been buying up craft breweries, left, right, and center, so that when people buy craft beer, they believe they are buying it from [local brewers] but instead they are actually fueling the large companies,” Field says.
Beer brands may also escape the worst effects of US tariffs, as unlike spirits they can be produced in different countries, allowing companies to adapt their supply chains more swiftly to meet consumer demand.
“What [the tariffs] will do for a while is put a price differential between international and national brands. Which could see people returning to buying more national brands again,” says Field.
“But ultimately the largest breweries and the large spirit companies still own those big national brands. So, it’s simply a shift from one brand to another and if anything, it might remove some of the international competition they are facing.”
Key Morningstar Metrics For Heineken HEIA
Analyst: Verushka Shetty
- Economic Moat: Narrow
- Fair Value Estimate: EUR 100.00
- Morningstar Uncertainty Rating: Medium
- Sector: Consumer Defensive
- Morningstar Rating: ★★★★★
- Forward Dividend Yield: 2.66%
Will James, portfolio manager of Guinness European Equity Income, which has a Morningstar Medalist Rating of Bronze, has opted out of investing in the largest beer and spirit names and chosen a more defensive name in the new tariff era.
Instead he backs Royal Unibrew RBREWc, the Danish brewing company, which produces a range of products from beers to soft drinks. The stock makes up 3.31% of the fund.
Key Morningstar Metrics For Royal Unibrew RBREWc
Analyst: Verushka Shetty
- Quantitative Economic Moat: Narrow
- Quantitative Fair Value Estimate: DKK 447.40
- Sector: Consumer Defensive
- Quantitative Morningstar Rating: ★★★
“From a Royal Unibrew perspective it isn’t impacted by tariffs because it is not selling beer in the US or any other drinks. It’s more of a [domestic play]. Although, it’s unlikely to escape a wider sector derating.”
“But we are not interested in Pernod Ricard. We are not interested in Diageo. And that sector appears to just be in the eye of the storm,” he says.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
