These alcohol stocks are likely to avoid a one-two punch from Ozempic and abstinent Gen Z consumers

Published Mon, Dec 4 20233:05 PM EST

At 25 years old, Brooklyn resident Katie Pell should be in the prime of her alcohol consumption. But Pell, who works as a ceramicist and creative consultant, quit drinking entirely earlier this year, saying the association with hard partying wasn't for her. "There was an overwhelming and very powerful expectation that we were supposed to be partying really hard," Pell said. She described the world she was avoiding: "You don't drink to drink — you drink to get completely obliterated type-of-culture." Many in her generation have joined Pell in pulling the plug on alcohol. Indeed, studies show that drinking alcohol is less in vogue with younger millennials and Gen Z. One Gallup poll revealed that the percentage of adults aged 18 to 34 who drink alcohol has fallen to 62% from 72% in the past two decades. As the industry works to tailor products to this new generation, some see another threat looming: the rising prevalence of GLP-1 drugs used to treat diabetes or help patients lose weight. The increased use GLP-1s has pushed investors to look for disruptions in all sorts of industries , challenging some basic business assumptions. While there are skeptics, investors in beer and spirits stocks expect the companies will adapt to any societal changes. Mounting concern around weight loss drugs GLP-1 drugs, which mimic the action of the glucagon-like peptide-1 hormone and stimulate insulin secretion after a meal, lower blood sugar and send feeling of fullness to the brain. Some experts say this feeling of satiety can extend to cravings for alcohol. Drugs in the category include Novo Nordisk's Ozempic and Wegovy and Eli Lilly's Mounjaro and Zepbound. With the prevalence of obesity in the U.S., some analysts suspect many people will wind up on these medications, swelling the GLP-1 global market to more than $100 billion in annual sales by 2030 . Whether these drugs will affect the alcohol business is unclear. Current research is mostly inconclusive, although a JPMorgan report in October claimed that alcohol demand was better among Ozempic users, citing one researcher's data. In another recent report, Goldman Sachs analyst Jason English said "It is not clear that overall alcohol is under pressure" from GLP-1 drugs as many variants of liquor appear to have tailwinds. One key to the outlook is that there's not a large overlap between the demographics of alcohol drinkers and GLP-1 users, said Nadine Sarwat, a Bernstein analyst. Alcohol consumption is concentrated among populations in developed nations, with Sarwat's analysis showing that 20% of the adult population typically consumes between 60% to 90% of total alcohol volume. The average alcohol drinker in the U.S. tends to be a younger adult, particularly males and typically either white or Native American. Income wasn't a huge determinant. By contrast, the average GLP-1 user is likely to be middle-aged, with an equal likelihood of being a male or female. African Americans and Hispanics are much more likely to be obese. "The overlap is either mixed, or even slightly negatively correlated and this also is confirmed in academic studies that show that there is no conclusive relationship between alcohol consumed and weight," Sarwat told CNBC. What's more, GLP-1 drugs are an overwhelmingly American topic, with most Europeans unaware of them or unwilling to pay high prices. In total, GLP-1 users are only a very small slice of total alcohol consumers, said Spiros Malandrakis, lead alcohol industry researcher at Euromonitor International. As a result, while GLP-1 drugs are likely to disrupt a host of industries, such as sugar drinks and snacks, Sarwat believes they're far less likely to impair alcohol demand. Gen Z cuts back More worrisome for the industry is the very real trend of consumers — especially young adults — moving away from imbibing altogether. This phenomenon can be attributed to several different reasons, including health concerns. Take Pell. The Brooklyn resident started drinking at 14 and began weaning herself off alcohol when she went to college. Her idea was to create deeper and more meaningful relationships with her peers that didn't involve partying. But even as she cut back on alcohol, she still was experiencing negative physical reactions such as a sensitive stomach and acne, and high anxiety and depression. BUD YTD mountain Anheuser-Busch Inbev shares are up 5% year to date. After talking to a friend who'd improved her autoimmune disease by reducing the inflammation in her body, Pell quit drinking. Eight months later, Pell stays sober at social functions, and has no plans to ever go back to drinking again. Sarwat said younger people may also be drinking less as a byproduct of their social environments. "Probably the way that we socialize now is different — it's not centered around alcohol in the same way that it was before," she said. Mickey Velado went from having 10 to 14 drinks a night several times a week in college with his fraternity to now drinking around twice a month. He made the change to focus on his health and increase his productivity. The 26-year-old Los Angeles robotics engineer said part of the reason it's been easy for him to scale back is because none of his current friends are big drinkers either. Legal marijuana is also giving younger cohorts more flexibility. "There was definitely a slowdown in alcohol consumption in the early markets" that pot entered, said Brian Sudano, a managing partner at Beverage Marketing, a consulting and research firm. "Not huge, but there was definitely a slowdown in Colorado, in Washington and in California." That's likely to grow as more states adopt legal forms of marijuana. In 2022, hemp farming was officially legalized after a five-year pilot program in North Carolina, where Nell Healy lives. The 25-year-old software engineer began reducing her drinking last year, partly to lower her risk for certain cancers that run in her family as well as to ease her depression and anxiety. Today, Healy has about one drink per month instead of one or two a day after work, having switched almost entirely to cannabis. STZ YTD mountain Constellation shares are up nearly 4% year to date. "When work was over, I would crack open a nice, beautiful, juicy IPA, and lounge around," Healy said. "Now I have pretty much that same exact routine, but I do it with a bowl [of pot] on the porch." Still, Healy said she first got into craft beers because she liked the flavors and has found herself missing the taste. So she's recently noted an increase in the availability of nonalcoholic alternatives at her local grocery store and plans to sample hop water and Guinness 0.0. Nonalcoholic beverages are exciting to Malandrakis, the industry researcher. "This is not a fad. This is not the latest craze about Ozempic that's only three months old. This is already a seven-, eight-year-old trend with massive investments from all the major manufacturers," he said. The rise of no-alcohol drinks Nonalcoholic beverages — or those with less than 0.5% alcohol by volume — account for only around 1% of global alcohol sales today, but have doubled since 2011. Malandrakis sees a lot of upside, especially since new nonalcoholic beverages, like the ones that have caught Healy's attention, are distinguishing themselves from their predecessors. In the past, nonalcoholic beers were considered bottom-shelf products that tasted bad and were reserved for teetotalers. But manufacturers have invested large sums and advanced technology into brewing new nonalcoholic products in such a way that they almost exactly mirror the flavor profiles of their alcoholic cousins. Software engineer Ryan Brigden, 27, quit drinking in the past year to lose the pounds he'd gained during the pandemic and help lower his blood pressure. Now Brigden, formerly an avid beer drinker, is a fan of new nonalcoholic beers. His three favorites are Corona Non-Alcoholic, Heineken 0.0 and craft beers from the Athletic Brewing Company. "It's the whole experience — having a cold drink that tastes like beer, that has the carbonation and then just having something in your hand," he said. "The new nonalcoholic beers are so good, like the new Corona … the only thing you're missing is a bit of a buzz. So you can basically get the full effect of drinking a Corona if you have a fake Corona." Nonalcoholic beers tend to have fewer calories, providing another health benefit. Brigden ignores the sometimes higher price, believing the health benefits outweigh the cost. DEO YTD mountain Diageo's U.S.-listed shares are down 20% since the start of the year. Brigden, who lives in the San Francisco Bay area, has noticed nonalcoholic beers are increasingly available in local grocery stores, restaurants and bars. That's critical for Brigden, who can feel alone in his abstinence. Of the companies covered by Sarwat, the Bernstein analyst, Heineken Holding , Carlsberg and Anheuser-Busch Inbev are the three biggest in the nonalcoholic market. Constellation Brands has recently made a splash by introducing Corona Non-Alcoholic beer. While nonalcoholic beer remains just 1% of the total alcohol market in the U.S., in Europe it is much larger, at around 10%. Malandrakis expects the movement has legs in the U.S., especially since younger consumers have invented trends such as "damp" drinking — a lifestyle in between dry and wet — in an effort to curb their alcohol intake. He said most of the industry's major players are increasingly extending nonalcoholic offerings as part of their own brands. There are new brands being created and smaller players are being acquired. These products have another advantage: higher profit margins thanks to manufacturers avoiding alcohol taxes, Malandrakis said. Spirits companies also see an opportunity here, too. In 20 years, Malandrakis expects the landscape might look vastly different, with nonalcoholic beverages evolved for function and tailored products addressing specific occasions. He mentions a caffeine-infused product for a high-energy night out, another to aid sleep, and "cross pollination with the emerging cannabis drinks segment." Beverage Marketing's Sudano is more cautious. He said that just because some big players have jumped in, that doesn't mean the movement will take off. He drew parallels to when manufacturers expected that ciders would be the next big thing, and threw around vast amounts of money until consumers lost interest. And while today's nonalcoholic craft beers may be tastier, there are a few huge cultural reasons why the category is less popular in the U.S. than in Europe such as a large Muslim population that abstains from drinking altogether, Sudano said. In Europe, nonalcoholic beer is marketed more like a soft drink, and is often infused with fruit and seen as more culturally acceptable and accessible. A study done a few years ago showed that American consumers did not want a fruit-flavored nonalcoholic beer when they could receive the same flavor through nonalcoholic seltzers, soft drinks or juices. Stock winners Joseph Gabelli, a portfolio manager at Gabelli Funds, said no matter how the market evolves, major manufacturers will come out on top. He is "particularly bullish" on Diageo , the British company known for brands such as Guinness stout, Baileys liqueur and Tanqueray gin. Gabelli said Diageo's global exposure insulates it from both the impact of GLP-1s and lower consumption from Gen Z in the U.S. What's more, Diageo's spirits business in tequila and Scotch, both of which are rising in popularity abroad, presents growth opportunities. Moreover, Diageo, whose ADRs are down 20% in 2023, is cheap relative to its history, he said. The portfolio manager is doubtful weight loss drugs will hurt sales of alcohol, which he puts in the "'treat yourself' category" for most consumers. "Not all calories are created equal," Gabelli said. "And I think that consumers of alcohol are not necessarily consuming alcohol for sustenance purposes. There's social aspects to it, there's join-in aspects to it. And for the average consumer, it's also very infrequent consumption." Shifting tastes CFRA Research analyst Garrett Nelson said investors navigating new challenges for alcohol stocks should choose companies that are identifying how to appeal to younger consumers, either by expanding into nonalcoholic or low-alcohol products, or offering more bourbons or tequilas, which are growing in popularity. Younger drinkers, he said, are often choosing more premium brands at higher price points. The most vulnerable purveyors are those that are trailing the shift in consumption, notably domestic, non-premium beer brands. They've been "losing market share for a long time, over the last decade or so," to craft breweries, as well as the growing hard seltzer and other ready-to-drink beverages market, Nelson said. Instead, the analyst's top pick among the alcohol stocks he covers is Molson Coors, which has a robust portfolio of brands that make it a "strong buy." Molson Coors has also benefited from the Bud Light controversy, snapping up market share from Anheuser-Busch InBev. "We think consensus estimates are too low." Molson shares have gained nearly 22% since the start of the year. According to LSEG, most analysts have a hold rating on the stock, with average price targets predicting a 6% climb from its current level. Constellation Brands may also prove attractive. While Nelson only has a hold rating on the stock, he said its imported beers such as Corona are an advantage as domestic beers falter. He also rates Anheuser Busch a hold, saying that like other brewers, it will have to prove whether it can continue to exert pricing power as inflation eases. In the end, Gabelli said he's ultimately optimistic on the sector as knowledge of premium alcohol brands grows around the globe, and spirits companies continue to gain share in Brazil and India, where spirits are so often "an aspirational purchase."