Diageo (LSE:DGE) shares now trade around 1,685p, a level last seen more than a decade ago and less than half their early-2022 peak. With costs being cut and the portfolio reshaped, the key issue is whether the company can stage a meaningful recovery.

Cyclical pressures dominate

Two words sum up Diageo shares: falling knife. Yet I continue to believe that much of the weakness in its core markets reflects temporary post-Covid disruptions, not a permanent industry shift.

In the aftermath of Covid, inventory levels swelled as distributors anticipated strong demand for premium spirits once lockdowns eased, only for consumption patterns to normalise faster than expected.

On-premise sales in bars and restaurants remain below pre-pandemic levels in many markets, a clear cost-of-living effect rather than a rejection of alcohol itself. While younger drinkers have embraced moderation, the slowdown is not a universal structural change.

Over the past few years, the data shows younger drinkers are being exposed to premium spirits earlier than previous cohorts. Ready-to-drink formats and social media-driven trends mean Gen Z is engaging with the category differently. That said, in my view the underlying demand for high-quality spirits remains intact.

Cost discipline and new CEO

Diageo now has Dave Lewis – dubbed ‘Drastic Dave’ based on his past fondness for drastic action – as its new CEO. Tackling how much people drink is largely out of his hands, but simplifying operations and aligning leadership is not.

The company has over 200 brands and tens of thousands of employees. Marketing spend has long been spread across too many brands and campaigns, often failing to drive growth at the point of sale.

Consequently, I think early wins are likely to come from pruning distractions, clarifying priorities, and tightening processes, rather than dramatic restructuring.

Longer-term view

The question isn’t whether Drastic Dave can stabilise the business in the short term – I have no doubt he can. The bigger one is whether he can make it stick.

Diageo has a cultural problem, and for that there is no easy fix. Its mission and values have been lost amid a haze of mergers and acquisitions and, in my opinion, the company has lost its sense of identity.

A business like that can tinker with all the pieces on the chessboard it wants, but it won’t revive itself in the long term.

The bottom line

Further pain is inevitable for shareholders. The business still faces complexity, cultural drift, and the challenge of aligning a sprawling portfolio. These aren’t things that can be fixed overnight.

Maybe the market has already priced in most of this. Investors haven’t seen a forward price-to-earnings (P/E) ratio this low — just 13 times — in over a decade, and the 4.8% dividend yield also catches the eye. That said, the company could cut the payout if earnings come under further pressure.

Ultimately, it comes down to whether the business can get back to what it does best: making and building fantastic drinks. If it can restore focus and culture while navigating the current cyclical trough, today’s price will almost certainly look like a bargain in hindsight.

I’ve just opened a position. I think the risk-reward ratio favours long-term, patient investors, but it won’t be a smooth ride, and short-term volatility should be expected.