Diageo (LSE:DGE) is certainly one of my favorite FTSE 100 shares. Over the past couple of years, I’ve been shopping for because the share price falls.

I’m nonetheless assured within the underlying enterprise, however I believe 2025 is shaping up to be an actual take a look at for the corporate. And it may go certainly one of two methods.

Model energy

A key a part of Diageo’s power is the ability of its manufacturers – it has main merchandise in classes like scotch, vodka, and gin. And this offers the agency a bonus over its rivals.

Over the past couple of years, nonetheless, the inventory has been falling as a result of difficulties past the corporate’s management. Macroeconomic challenges have been an enormous a part of the difficulty.

The US has been particularly powerful. I see Diageo’s main place there as a long-term power, nevertheless it hasn’t been this fashion in 2024, with demand faltering throughout its merchandise.

Regardless of this, the largest take a look at could be but to come back. The specter of 20% (or 25%) tariffs on a few of its merchandise in 2025 may – I believe – be the final word take a look at of Diageo’s model power.

The final word take a look at

If the prospect of tariffs on imported spirits materialises, Diageo will discover itself confronted with larger prices. The query is what it decides to do about these – and what occurs because of this.

One possibility is to attempt to go these on to wholesalers by elevating costs. The danger with this technique in an business the place switching prices are non-existent is prospects would possibly simply go away. 

I believe this will probably be an enormous take a look at for Diageo. The purpose of getting sturdy manufacturers is that it reduces the necessity to compete on price as a result of folks need that particular product, even when it’s costlier.

I don’t anticipate the corporate to have the ability to go via a 20% price improve in 2025 with out gross sales volumes falling away. However I do anticipate it to have the ability to do one thing.

Make-or-break time

I see this as make-or-break time for Diageo. The agency has to indicate its model power permits it to extend costs with out freely giving vital market share to rivals.

Doing this efficiently will quantity to an enormous present of power. And I believe it might even be a sign that the falling share price is a chance to purchase shares in a top quality enterprise.

If it could’t do that, nonetheless, a big a part of what I take to be the explanation for proudly owning the inventory falls away. And that may make me rethink my funding within the firm. 

To reiterate: I’m not anticipating Diageo to have the ability to improve costs by 20% (or any eventual tariff quantity). However I’m in search of the agency to have the ability to cut back the affect of import tariffs to a minimum of some extent.

Deliver on 2025

Tariffs are an unwelcome impediment for Diageo. Scotch whisky can solely be produced in Scotland, so there’s no strategy to keep away from the import taxes in the event that they emerge.

A part of my cause for getting the inventory, nonetheless, was that the corporate has the flexibility to rise to challenges like this. I’ll be watching intently in 2025 to see if it could ship.