Friends hi-fi system not very good, what do you do or say?

I usually either find "better friends" or bring a bottle of tequila to inhance the listening experience. 

The other option is to tell him he needs a sub woofer....everyone can relate to that. 

I always try to be diplomatic, keeping my own HiFi journey in mind—the decades it has taken, like for most of us, to get to where we are. With that perspective, I make thoughtful suggestions that align with incremental financial steps, understanding the costs involved. I also highlight the value of the used market and recommend brands that hold their resale value, so if something doesn’t work for their space, they can easily try something else. It’s about planting seeds to help them begin their audiophile journey. 

Of course, there are caveats. If something sounds genuinely bad—like a blown tweeter or another serious issue—I’ll point it out. But if it sounds decent, I’ll encourage them by focusing on what’s good. Ultimately, if it’s a friend, they’ll probably end up at my house for a demo anyway.

My mother used to often tell me "If you can't say something nice, don't say anything at all".

Do you tell people that they are less attractive than you are?  That their car or house isn't as good as yours?  Why do you need to say anything?

If they ask about improving their system, then offer helpful advice.

. . . or if your friend's system was not up to your standards, instead of following my previous suggestion, you could simply kick the dogcrap out of the woofers of his full range speakers and then tell him, "Look, dude, I just did you a favor--this will give you a reason to start upgrading this piece of crap system."  The time will come when he will thank you for this..  

Even if a close friend pressed me to tell them my opinion of their system I'd be inclined to say. 

"My opinion is not important. It is your system. The important thing is whether or not you like the sound of it".