Is booze approaching its Big Tobacco moment?

By the time cigarette bosses were hauled in front of the US Congress in 1994 and gave their infamous testimony that they did not believe nicotine was addictive, smoking had been in decline for more than two decades.

A drop-off in drinking is prompting fears among investors that alcohol is facing its own “tobacco moment”, as health authorities call for cigarette-style warning labels and moderation becomes mainstream.

In the US, the sector’s most important market, alcohol consumption per person fell 3 per cent last year in the biggest drop since the prohibition era a century ago, according to research by Bernstein. Drinking is now languishing at its lowest level since 1962, down 20 per cent on its 1980s peak.

The World Health Organization said last month that drinks should carry prominent labels warning consumers of the link between alcohol and cancer, something Ireland will become the first country to do in May next year. Spirits stocks took a hammering in January after the outgoing US surgeon-general made a similar recommendation.

The warnings come as declining alcohol consumption, growing health awareness and the effects of weight-loss drugs on drinking habits cement a negative narrative around the industry.

“I’m spending all my time talking to investors about this topic: is alcohol the new tobacco?” said Bernstein analyst Trevor Stirling.

Smoking rates started to plummet in the 1970s when evidence emerged that tobacco was highly addictive and was making millions of people ill. While alcohol’s decline has been more gradual, with consumption in developed markets steadily falling since the 1960s, according to the WHO, a steeper drop-off over the past three years has sounded alarm bells for investors.

Global drink stocks have sunk almost 8 per cent in the 12 months to February. Alcohol shares now trade at a significant discount to the rest of the consumer goods.

During their half-year trading updates last month, companies reported other disappointing results, with sales in the US market failing to growth as investors hoped. US President Donald Trump’s tariffs, which could hit imports of Canadian whisky and tequila from Mexico, have exacerbated the gloom.

Spirits giant Diageo last month scrapped a long-standing sales growth target, blaming uncertainty over US tariffs as well as weak consumer demand.

But Debra Crew, chief executive, also sees shifting habits as a key challenge facing the industry, telling a recent conference that moderation was the industry’s “biggest disrupter”, while low and non-alcoholic drinks were “one of our greatest opportunities”.

Veteran investment manager Terry Smith dumped his fund’s stake in Diageo in January after almost 15 years over doubts about the company’s new management team and the threat to demand posed by the obesity treatments known as GLP-1s. 

Studies show that weight-loss and diabetes drugs, such as Wegovy and Ozempic, could cut opioid and alcohol abuse up to half.

“It seems likely that the drugs will eventually be used to treat alcoholism such is their effect on consumption,” Smith wrote. Diageo declined to comment on Smith’s divestment.

The valuation gap between alcohol and tobacco stocks has been narrowing. Spirit stocks have sunk from a peak price-to-earnings multiple of 30 times during Covid-19 — when alcohol consumption soared during lockdowns — to 16 times today, according to Jefferies analysis, against a consistent multiple of 10 in the tobacco industry.

“During my 20 years of covering the drinks sector, the degree of investor questioning around alcohol has never been more prominent,” Jefferies analyst Ed Mundy wrote in a research note titled “Is alcohol the next tobacco?”

Edward Kevis, fund manager at Aviva Investors, said younger people drinking less alcohol had also created “structural uncertainty” around the sector.

“What is clear is the demographic trends and consumption habits are pointing to lower consumption from the younger consumers who are just living a more healthy lifestyle,” he said.

He added that social media was making young people more focused on how they look and behave, which acted as a further deterrent to heavy drinking because of its weight-gain effects.

Gallup has surveyed people aged between 18 and 34 every decade since 2001 to track the number who say they have drunk alcohol in the preceding week. Results have declined from 49 per cent in 2001 to 38 per cent in 2023.

“Younger people do drink less alcohol . . . but no one has been able to say how much of a threat is that [to sales],” said Bernstein’s Trevor Stirling, who estimated the combined impact of GLP-1s, cannabis and young people drinking less was no more than 1 per cent drag on sales in the next five years.

Laurence Whyatt, analyst at Barclays, noted that the data showing young people drinking less was largely from surveys, so not fully reliable. Research by the bank found that Gen Z was spending a similar or higher proportion of its income on alcohol compared with other generations.

“We suspect Gen Z’s relatively low absolute spend on alcohol has more to do with the group’s lower earnings profile,” he said. “As earnings increase, we think it is reasonable to expect alcohol spend to rise with it.”

The industry has countered fears of a structural shift by arguing that the consumption decline is predominantly due to cyclical factors and that it is too soon for GLP-1s to have weighed on sales.

“The biggest part of the moderation we are currently seeing . . . is economic-driven moderation,” Alexandre Ricard, chief executive of French spirits group Pernod Ricard, said after the company’s half-year earnings last month.

High inflation since 2021 has suppressed typically resilient US spending. Drinkers and retailers have been getting through bottles they built up during the booze boom of Covid-19, when many drinkers spent their lockdown savings on high-end spirits.

Roseanna Ivory, investment manager at Aberdeen, said the “extraordinary” level of alcohol consumption in 2021 had led companies to raise guidance because they believed it would last.

“What we’re talking about is a normalisation — there’s always an overcorrection,” she said. “It will take a bit longer to get back to the same growth rate.”

The industry, meanwhile, has acknowledged the moderation trend, particularly among Gen-Z drinkers.

Diageo’s Crew, previously chief executive of Reynolds Tobacco, said it was not possible to separate the GLP1s’ impact and other threats from “overall moderation trends that we’ve been seeing and following for decades, which is that people want to drink better, not more”.

Like tobacco bosses before them, who pivoted to smoke-free alternatives to offset shrinking sales, drinks executives have couched moderation as a growth opportunity, pouring investment into no and low-alcohol beverages to retain abstinent consumers.

Ed Mundy of Jefferies said that unlike the tobacco industry, which hid its knowledge of how harmful its products were, the alcohol sector has actively engaged with regulators on promoting responsible drinking.

“Alcohol can’t have its big tobacco moment,” said Aberdeen’s Ivory, “because we’ve always known its bad for us”.

Additional reporting Gregory Meyer in New York