Diageo's Tequila Troubles: A Brewing Storm for Investors?

The rise of tequila as a global luxury spirit has been a boon for Diageo, the world's largest spirits company, which owns top brands Casamigos and Don Julio. But a growing legal maelstrom threatens to disrupt this success. Multiple class-action lawsuits allege that these premium tequilas are mislabeled, containing far less agave-derived alcohol than claimed—a charge that could imperil Diageo's reputation and financial health. With billions at stake, investors must weigh whether the company's stock is overvalued or resilient enough to withstand the storm.

The Legal Crossroads: Mislabeling Claims and RICO Accusations

The lawsuits, filed in U.S. courts since 2023, hinge on independent lab tests alleging that Casamigos and Don Julio contain as little as 33% agave-derived ethanol—far below the 51% minimum required for “mixto” tequila, let alone the 100% agave purity Diageo claims. Plaintiffs argue this constitutes fraud, seeking damages for consumers who paid premium prices for allegedly inferior products. The July 2025 RICO lawsuit in San Francisco adds a dramatic twist, accusing Diageo of orchestrating an “Adulterated Tequila Enterprise” with Mexico's Tequila Regulatory Council (CRT), which plaintiffs claim has been compromised by industry influence.

Diageo denies all allegations, asserting compliance with CRT certification—a process it calls rigorous and government-backed. However, the CRT's perceived conflicts of interest (e.g., Diageo's leadership roles within the council) have fueled skepticism. If courts side with plaintiffs, Diageo could face not only financial penalties but also reputational damage that erodes trust in its premium brands.

Financial Risks: Damages, Legal Costs, and Sales Declines

The stakes are enormous. Class-action certifications could encompass millions of consumers who purchased Casamigos or Don Julio over years, with potential damages exceeding $1 billion. Even a partial settlement might strain Diageo's margins. Meanwhile, ongoing litigation and negative publicity could deter drinkers from premium tequilas, forcing price cuts or volume declines.

Consider Diageo's stock performance amid these developments:

The stock has fluctuated, but significant dips occurred after lawsuit filings in May and July /2025, suggesting investors are reacting to legal risks. If the cases escalate, volatility could intensify.

Brand Resilience: Can Luxury Pricing Survive a Trust Crisis?

Diageo's premium tequila brands command 30–50% price premiums over standard tequilas. But trust is the linchpin of such pricing. If consumers perceive mislabeling, they may switch to competitors like Patrón or premium mezcal, which have not faced similar allegations. Agave farmers' protests and media coverage of the CRT's potential complicity further threaten brand equity, potentially triggering a long-term decline in market share.

Regulatory and Industry Shifts: The Bigger Picture

The lawsuits may also spur broader regulatory changes. The CRT's credibility is under siege, and U.S. authorities could demand stricter certification processes. For Diageo, this could mean higher compliance costs or a need to reformulate products to meet agave-content thresholds—a costly endeavor for a company built on agave's scarcity as a selling point.

Investment Implications: Navigating the Legal Uncertainty

Short-Term Strategy (0–12 Months):
- Risk Aversion: Investors with a short-term horizon may want to reduce exposure to DGE.L until legal outcomes become clearer. The stock's sensitivity to lawsuit-related news suggests it could remain volatile.
- Shorting Opportunities: Consider shorting the stock if the San Francisco RICO case gains traction, as such claims could trigger a sharp drop in valuation.

Long-Term Outlook (1–5 Years):
- Brand Recovery Potential: If Diageo can settle lawsuits without admitting fault and restore agave content to legal levels, its entrenched market position and global distribution could allow recovery.
- Valuation Adjustments: The stock's current valuation may already reflect some risk premium, but a negative ruling could force a deeper re-evaluation.

Final Analysis: A Risky Gamble or a Buying Opportunity?

Diageo's tequila litigation is a high-stakes test of its ability to balance aggressive growth with regulatory and consumer trust. While its scale and brand strength offer resilience, the potential for large settlements and reputational harm cannot be ignored. For investors, the path forward hinges on the courts' rulings—and whether Diageo can pivot to rebuild trust before the damage becomes irreversible.

Recommendation:
- Hold or Sell: Avoid new positions until legal clarity emerges.
- Watch CRT Reforms: Closely monitor regulatory changes in Mexico and the U.S., which could amplify or mitigate risks.
- Consider Options Trading: Use put options to hedge against downside risks while avoiding long-term commitment.

In the world of luxury spirits, trust is a fragile commodity. Diageo's stock now sits at a crossroads—one where truth in labeling may determine its trajectory for years to come.