Over the past few months, the stop-and-start tariffs imposed by President Donald Trump have rocked the market. For any company that imports into the U.S., naturally, tariffs are a particular worry.
The potential effects on such companies could be a canary in a coal mine for other importers. That's why keeping an eye on a company like Diageo (DEO 1.93%) is a good idea.
A huge drink list
Diageo might not be a familiar brand name on its own, but it's got some awfully familiar brands in its portfolio. Some of the alcoholic beverages it owns might be in your liquor cabinet right now. Its more than 200 libations include Guinness beer, Smirnoff vodka, and Bailey's Irish Cream liqueur.
Image source: Getty Images.
The U.S. is Diageo's largest single market. The company has sensibly built a U.S. presence, with 12 production sites cranking out the drinks that please customers.
Yet much of Diageo's production originates in Europe, so the company is a big importer into the U.S., and thus subject to Trump's tariff regime, with the rate recently raised from 10% to 15%.
Even at the lower rate, the tariff regime was affecting Diageo. In its second-quarter earnings update, the company estimated that tariffs would take $150 million in annual costs.
Small effect, significant issue
That's something of a drop in the bottle for a business with yearly sales over $16 billion, and headline net profit that lands north of $3 billion.
Still, $150 million is a lot of scratch for any business, regardless of its size. In that update, Diageo wrote that unspecified measures it took before the 10% tariff was levied helped mitigate about half of the effect on operating profit. We'll see where that lands the bottom line in coming quarters.
Diageo is signaling that tariffs are a wet blanket, even for the largest of importers. Investors should watch how this busy liquor shipper deals with increased rates, and it may give them some insight on how other companies will handle the situation.
