Consumer brands are being marked down - where shareholders may still find value

Strong consumer names can reward long-term investors, but the trade-off matters. These are the opportunities offering shareholders the best value.

Consumer brands were once reliable outperformers. Lately, even established names such as Diageo, Unilever, and Reckitt Benckiser - companies that had steadily compounded shareholder value over many years - have struggled.

Brands such as Diageo's Johnnie Walker, Unilever's Dove and Reckitt's Dettol sell most of their products beyond the UK, which can work in their favor when sterling weakens. That international reach, along with high gross margins, has not translated into strong investor returns; even prominent fund managers including James Mackreides and Terry Smith were caught out.

During the dot-com crash 25 years ago and the 2007-2009 financial crisis, Unilever's share price still quadrupled between 2000 and 2020. Diageo rose sixfold, while Reckitt Benckiser gained almost 11 times. US technology investors might find those returns ordinary, but the FTSE 100 went nowhere over the same period; blue-chip names such as Lloyds Bank and Vodafone lost between 75% and 95%.

Part of that performance comes down to where these companies started. Investors in Reckitt, Unilever and Diageo were paying 20 to 30 times earnings - a premium valuation - for brands that can earn money over many years. Arthur Guinness began selling beer in 1759. Before the pandemic, low interest rates meant investors accepted small dividend yields because the discount rate applied to long-lived assets was also low. That changed when "risk-free" UK ten-year gilt yields climbed from around 1% five years ago to nearly 5.5%; the modest dividends offered by consumer staples groups no longer looked as attractive by comparison.

When inflation pushes nominal growth higher, consumer brands should generally have room to increase dividends. Diageo went the other way: at the group's December half year, it cut the payout in half to give management more financial breathing space. Sales were falling, reported earnings per share had dropped 26%, and net debt stood at £22 billion - 3.4 times Ebitda.

This marks a key difference between inflation in the 1970s and its return in the 2020s. The trigger was much the same - energy prices pushed up by conflict - but debt levels have mattered more for share prices this time. Companies carry more net debt; Diageo's interest costs, for example, are expected to be 2.3 times higher in 2026 than in 2022. Their customers are also more heavily mortgaged than households were in earlier decades. Middle-class professionals, unlike in the 1970s, have endured a sharp wage squeeze against inflation while carrying much more household debt relative to disposable income. Since the financial crisis, real wages in the UK have largely stalled. Low-paid workers near the minimum wage have done better than median earners - a pattern often called a "K-shaped recovery" - as incomes at both the top 10% and bottom 10% have risen, while those in the middle have lost ground after inflation.
Consumer-brand groups were expected to shield investors from inflation. Instead, they have lost market share, while revenue growth has stalled. Unilever's turnover is still below its 2012 figure: 50.5 billion now, compared with 51.3 billion then. Recovery may be under way. In its June first-half results, the group reported underlying sales growth of 4.8%. At 49 per share, the shares trade at 16.9 times December 2027 forward earnings, with an EV/Ebitda multiple of 12 times for that year. Those figures include the food brands; the McCormick deal is expected to complete next year.

Some consumer brands groups have lost the plot

Consumer-brands groups have drifted into bloated, unfocused operations. At Diageo, new CEO Dave Lewis is pursuing £1 billion in annual savings - 12% of administrative expenses - to cut waste and redundant work. Terry Smith raised a similar concern about Unilever in his 2021 letter to investors, asking whether the company had "lost the plot" when management began debating Hellmann's mayonnaise in terms of its wider purpose and suggesting that buying the condiment amounted to a step toward sustainability and environmental friendliness.

Unilever answered the criticism by reshaping its portfolio: Magnum Ice Cream was separated in a 9 billion spin-off, while its US food brands were combined with McCormick. Magnum later reported 4.7% organic sales growth in its first-half results in June. Unilever trades at 16 times December 2027 forward earnings, with an EV/Ebitda multiple of 9.2 times.

Brands try to give people something to identify with: values that make a purchase feel personal. The aim is for a shopper to choose one ice cream over another because of what the brand represents, not simply because it costs less. But global reach brings caution, and managers afraid of offending anyone can sand away the character that made a brand distinctive. Reckitt Benckiser describes its purpose as "protect, heal and nurture in pursuit of a cleaner, healthier world." Diageo says its purpose is celebrating life. Maybe both have lost some of their edge?

Consumer brands have created expensive problems of their own, beyond the broader question of what they are for. Reckitt now faces legal trouble in the US over its infant formula. In March 2024, an Illinois state court jury awarded a plaintiff £60 million; in June this year, the court overturned the verdict and ordered a re-trial. The company's eventual liabilities are still unknown. Mead Johnson has already proved costly: in fiscal 2019, management wrote down 5 billion of goodwill from the acquisition, mainly because competition in China had intensified and growth in the Chinese market had slowed. Further major impairments followed in 2023 and 2024, this time tied specifically to the infant-formula business. Reckitt paid £16.6 billion for Mead Johnson in 2017 (13 billion at the time). It was an "unforced error," and ranks among the worst UK corporate acquisitions since Royal Bank of Scotland's bid for ABN Amro.

Investors need to be cautious

Investors are used to seeing overconfident bank executives make bad acquisitions at the wrong stage of the cycle. Consumer brands are a different matter: companies selling everyday products and over-the-counter treatments such as Strepsils and Nurofen should not normally give shareholders much cause for concern. Yet Reckitt's first-half results in June 2026 showed goodwill and intangible assets of 15.9 billion on the balance sheet - almost three times shareholders' equity, which stood at 5.7 billion. Net debt was 9.4 billion, equal to 2.5 times adjusted Ebitda. Like-for-like revenue grew by 2.6% in the first half, below inflation. The shares trade at 15.2 times forecast 2027 earnings, or 11 times that year's EV/ Ebita. Buffett's purchase of See's Candies in the 1970s turned out differently. With Mead Johnson, the problem came from the acquisition's "goodwill." Kraft-Heinz, which Buffett backed a decade ago, has also struggled: its shares have fallen 70% since 2017. Even top investors can misjudge consumer brands.

The case for buying Diageo

Diageo owns Johnnie Walker, Smirnoff, Guinness and roughly 200 other brands. Its valuation has fallen sharply: from more than 30 times earnings during the pandemic to 13 times P/E today. The earlier enthusiasm partly reflected the surge in drinking at home, with sales rising by about 40% to 15.5 billion over the two pandemic years ending in the June 2022 financial year.

That pace could not last, and sales are expected to stay below £20 billion (15 billion) through the June 2029 financial year. Concerns that GLP-1 weight-loss drugs may cut alcohol consumption have contributed to the company's lower valuation, but Diageo's revenue slowdown began well before those drugs arrived. Sales barely moved from 2013 to 2018. Management's response was that even as people drank less, they would spend more on better-quality products - a shift often called "premiumisation."

Generation Z - people born between 1997 and 2010 - is drinking less. Premiumisation may have looked attractive to management and high-earning fund managers, but middle-class customers were less likely to see the appeal. Those in the upper half of the "K-shaped recovery" may have lost touch with the pressures facing consumer-brand groups' customers.

Diageo no longer looks like the "quality compounder" investors once saw. It has become a turnaround case, with new CEO Dave Lewis taking a kitchen-sink approach to his first results. The former Unilever chief, widely respected for reviving Tesco, was announced as Diageo's next CEO in November last year and took over at the start of this year. He moved quickly: the dividend was cut in February, followed by a Capital Markets Day (CMD) in August. There, management set out plans to save £1 billion a year, including £850 million from group overheads and back-office operations and £150 million through supply-chain efficiencies. For the financial year ending in June, organic group sales fell 2%, with North America recording an 8% decline. Management expects North America's sales to keep weakening, while the group's medium-term target remains low single-digit organic growth.
Management expects its ready-to-drink (RTD) products - pre-mixed gin and tonics, for example - to drive growth and attract younger customers. It is also retreating from premiumisation, putting more weight on value brands as financially pressured customers become harder to retain.

Diageo trades at 13.3 times June 2028 forward earnings and 10 times EV/Ebitda for the same year - well below its historic averages. The dividend was cut to £0.50 (or 37p) in February, leaving the shares with a 2.5% yield, though full-year earnings now cover the payout three times. After falling 60% from their 2022 peak, the shares have started to recover this year. They are a buy.

Bruce owns shares in Diageo