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Are Abstinent Millennials Bad News for Alcohol Stocks?

A generation of non-drinkers may be causing the investment case for drinks companies to dry up

Holly Black 23 February, 2018 | 7:04AM

Diageo brand Guinness alcohol company sin stocks booze

Millennials – those aged 18 to 34 – and Generation Z – currently in their teens – are avoiding alcohol in favour of healthier options.

A survey by Eventbrite last year revealed the average millennial consumes just five units of alcohol a week – equivalent to two small glasses of wine – with more inclined to see getting drunk as “pathetic” and “embarrassing” rather than “cool”. Meanwhile, research by the Office for National Statistics found that 27% of people aged 16 to 24 were teetotal, compared to just 16% of those aged 45 to 64.

The trend is not just evident in the UK either. Research by stockbroker Berenberg, which compiled the views of 6,000 Americans aged 16 to 22, found “Generation Z is already exhibiting significantly lower levels of alcohol consumption than previous generations…and expects to consume alcohol less frequently than previous generations when they are older, as well as consuming quantitatively less on the occasions that they drink”.

Following its research, Berenberg said it was left “with a relatively negative view about the outlook for alcohol consumption in the US”.

Bad News for Booze Stocks?

While healthier life choices are undoubtedly good news for life expectancy, they might not be so readily welcomed by the companies reliant on our consumption of alcohol for their earnings.  

Douglas Scott, co-manager of the Kames UK Equity Income fund, says: “A decaf skinny caramel macchiato and binge-watching on Netflix is more the order of the day than going to the pub for Millennials, and that will be become more acute with Generation Z, as they are very aware of the social and health impact of alcohol.”

But experts aren’t giving up on the sector altogether. Instead, many commentators believe companies will adapt to fit the next generation. Back in 2016, for example, Diageo (DGE) invested in a non-alcoholic drinks company for the first time in 257 years.

Just as tobacco businesses turned their attention to vaping when they saw the cigarette market going up in smoke, experts predict that drinks businesses will be able to adapt in order to survive.

Tom Becket, chief investment officer at Psigma Investment Management, says: “People’s tastes and lifestyles are changing, but in ways which can be profitable. Companies just need to find new products to hone in on this.

“Diageo is making sensible moves such as promoting non-alcoholic drinks and exploring alternative growth avenues, so people can still enjoy the social element of drinking without getting drunk.”

Pubs, too, are having to react to this change in their target audience. But it comes at a time when they are already facing the duel headwinds of rising costs from inflation and an increase in the National Living Wage.

Companies Must Adapt to Survive

Mark Swain, manager of the Smith & Williamson Enterprise fund, says the pub groups that will survive are those which can respond to the needs of their local market and which are nimble enough to be able to change.

He points to recently-listed City Pub Group (CPC), which has focused on premium locations in historic buildings and quality drink selections and craft beer. He also likes JD Wetherspoon (JDW), which as well as having a focus on low prices, has introduced apps customers can use to order their food and drinks while in the pub.

Those groups set to lose out, he predicts, are those which have focused on their casual dining offering, where there is too much competition. He also thinks large, centrally-run groups will lag as they struggle to shift their strategy: “In the face of stiff competition and a squeezed consumer, this is a difficult sector at the moment, but it’s much easier if you have 20 pubs to run rather than 1,200.” Swain’s fund, which has a Targeted Absolute Return mandate, has returned 30.9% over the past five years.

Both pubs and drinks group are also starting to recognise customers’ thirst for non-alcoholic beverages. The number of alcohol-free beers available to drinkers has grown quickly in recent years, and producers are now starting to branch out into non-alcoholic spirits.

Budweiser-maker AB InBev (ABI) has predicted that no- and low-alcohol beer will likely account for a fifth of its sales by 2025. Indeed, Frank Lampen of Distill Ventures, recently told the Economist that non-alcoholic drinks were the “biggest opportunity in the market”.

It’s worth remembering, too, that drinks companies such as Diageo, Pernod Ricard (RI) and Constellation Brands (STZ) are not just reliant on UK and US customers. Markets such as Russia and China, where premium spirit brands are particularly popular, still present strong opportunities, while Africa is the world’s fastest-growing beer market.

Becket adds: “Ultimately, these companies have some of the best management teams in the world, they have good cash flow and strong balance sheets that allow them to invest in new areas, and they have already demonstrated their ability to change and be successful – they will find new ways to thrive.”

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
Anheuser-Busch InBev SA/NV83.54 EUR-0.07
City Pub Group (The) PLC206.00 GBX0.00
Constellation Brands Inc A197.02 USD-0.14
Diageo PLC3,116.50 GBX-0.94
Kames UK Equity Income GBP B Acc264.04 GBP-0.29
Pernod Ricard SA161.00 EUR0.85
Wetherspoon (J D) PLC1,520.00 GBX-1.75

About Author

Holly Black  is Senior Editor, Morningstar.co.uk

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