Tariffs to Hit European Spirits Makers' Earnings and Margins

Shares of Diageo, Pernod Ricard, Remy Cointreau, and Davide Campari-Milano fell on March 13 after US President Donald Trump threatened to impose a 200% tariff on several alcohol products from the European Union. This followed the EU’s announcement of a retaliation against Trump’s 25% steel and aluminum tariffs: a tariff on US whiskey, along with other industrial and farm products.

On March 6, Trump postponed most of the 25% tariffs on imports from Mexico and Canada for a month. The situation is dynamic, with uncertainty about the magnitude of the hit to the spirits being exported to the United States.

We believe the trade war will hit spirits makers’ fiscal 2025 earnings to varying levels. Diageo anticipates a $200 million hit to profitability if the Canada and Mexico tariffs are imposed, as 45% of its US sales come from products produced in those two countries. Campari anticipates a hit of EUR 90 million-EUR 100 million if US tariffs are applied across Europe, Mexico, and Canada. We anticipate a lesser but still-notable hit to Pernod Ricard’s results, with 20% of net sales from the US. It is difficult to quantify the potential hit to Cointreau, as the US is a strategic region for the firm’s cognac and liqueur brands.

We’re keeping our fair value estimates unchanged for all these companies. We expect a short-term hit to margins across our spirits coverage. Our biggest uncertainty lies in the timing of a recovery in consumer confidence across the US. However, distillers often get caught in the crossfire of trade wars, and leading firms have a proven record of successfully mitigating tariff hikes. Therefore, we don’t expect a material long-term hit. Additionally, many spirits can only be produced in a specific region to qualify for the product name, protecting distillers’ long-term pricing power.