Healthy Consumers Force Drinks Firms to Adapt

Dry January points to a wider trend among drinkers, with non-alcoholic, low-calorie and premium beverages gaining in popularity

Holly Black 5 February, 2019 | 12:21AM

alcoholic drinks

Around 3 million people in the UK vowed to go alcohol-free for Dry January this year. Those aged between 35 and 54 are most likely to take part in the challenge and it is thought around two-thirds of people who attempt the month-long abstinence from alcohol succeed.

Consumers are becoming increasingly health-conscious and mindful about what they eat and drink. But what does that mean for the businesses that rely on the Brits’ love of beer? Pubs, brewers and spirits companies are having to adapt their offerings to remain relevant.

Douglas Scott, investment manager at Kames Capital, says: “Dry January is part of a greater structural shift, away from beer towards spirits, towards quality products, and towards lower-calorie options.”

This doesn’t appear to be a short-term blip. Figures from Kantar Worldpanel reveal sales of non-alcohol beer were up 58% last summer compared with the same period the year before. Research from Neilson found more than £43 million was spent on non-alcoholic beer in the year to July 2018 – equivalent to around 12.2 million pints – non-alcoholic ones at that.

Christopher Rossbach, managing partner at J Stern & Co, rates drinks makers Pernod Ricard (RI) and Diageo (DGE). He thinks quality firms in the sector, with good management and strong balance sheets, have little to worry about.

He explains: “Dry January is generally a response to excess consumption in December so it tends to even out over the course of the year.” He does, however, believe that drinkers are moving away from calorific beers to premium spirits as they look for “low-carb” and quality alternatives.

“There is a trend towards premiumisation. People are drinking less but want better quality in what they do consume,” he adds. “The same is true for chocolate and luxury goods, for example, so that’s good for Lindt and bad for Cadbury’s.”

Those brands that can position themselves at the premium end of the market should be well-placed to thrive. Diageo, for example, has had success with the launch of its Ketel One Botanical Vodka, which uses botanicals for natural flavouring rather than artificial ingredients. Gordon’s, meanwhile, has launched a low-calorie, low-alcohol version of its famous gin.

The same is true in pubs, a part of the industry which has particularly suffered from the shift in alcohol consumption. Many chains have shifted their focus to food as footfall has dropped and more are stocking so-called “grown-up” soft drinks to appeal to non-drinkers. Scott says that here, too, the winners will be those which can adapt: “Wetherspoons is a great example – it has low price, good products and is a well-run business.”

Experience Matters for Younger Generation

But younger drinkers are not only focused on their waistlines. Drinks companies need to tap into the different priorities and values of this generation, which is all about the experience, if they want to appeal. Pernod Ricard, for example, has an app offering customers in South Korea rewards when they drink Absolut Vodka and post about it on social media. In Spain, drinkers of Patron tequila will see a donation made to a charity of their choice each time they enjoy a tipple.

Rossbach believes it is the larger players in the industry that are best placed to benefit here because they have the scale and resource to trial new products and ideas. The proof of that can be seen clearly enough in recent results. Last week, Diageo reported operating profit had grown 11% to more than £2 billion as the continued “ginaissance” helped sales in the UK grow by 14%.

Graham Spooner, investment research analyst at The Share Centre, says: “The group has been increasing its focus on faster-growing brands, which has led to the sale of some of its smaller brands.”

Elsewhere in the industry, Japanese giant Asahi Group (2502) purchased the beer and cider business of Fuller’s for a hefty £250 million. Such consolidation is likely to continue as the big names in the sector snap up the smaller brands that have proven themselves to be successful.

For investors looking for exposure to these trends, there are a number of fund managers keen on drinks companies. The £2.5 billion Evenlode Income fund has almost 12% of its assets in drinks companies, with Diageo among its largest holdings. Manager Hugh Yarrow favour quality businesses that are capable of reliably growing their dividends.

Meanwhile, the £5 billion Lindsell Train Global Equity fund has 22% of its assets in beverage companies including Diageo and Heineken (HEIA). Manager Nick Train likes the brand loyalty the firms enjoy from their customers. He points out that expanding into low- and no-alcohol products not only allows them to appeal to a wider audience but means they can sell these drinks without the tax implications of alcoholic beverages.

Rossbach adds: “The idea that millennials are not drinking isn’t quite right; they are, but they have different preferences, the way they are consuming alcohol is changing, and they are more conscious of the overall experience. But actually, many of these companies have been good at adapting to that.”

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Diageo PLC3,163.50 GBX-0.53
Lindsell Train Global Equity B GBP Inc3.72 GBP0.58
Pernod Ricard SA155.45 EUR-0.03
TB Evenlode Income A Acc309.76 GBP-0.01

About Author

Holly Black  is a freelance journalist specialising in investments and personal finance

Audience Confirmation


By clicking 'accept' I acknowledge that this website uses cookies and other technologies to tailor my experience and understand how I and other visitors use our site. See 'Cookie Consent' for more detail.

  • Other Morningstar Websites