Podcast Summary: "Is the Beverage Industry Drying Up?"

Podcast Information:

• Title: Thoughts on the Market
• Host/Author: Morgan Stanley
• Episode: Is the Beverage Industry Drying Up?
• Release Date: April 23, 2025

Introduction

In this episode of Thoughts on the Market, Morgan Stanley's Head of the European Consumer Staples Team, Sarah Simon, delves into the evolving landscape of the beverage industry in America. Titled "Is the Beverage Industry Drying Up?", Sarah presents a comprehensive analysis of declining alcohol consumption trends and explores whether these changes are cyclical or indicative of a more permanent structural shift.

Declining Alcohol Consumption: A Structural Shift

Sarah Simon opens the discussion by painting a relatable scene: "Picture this. It's Friday night and you're at a bar with friends... a phony Negroni and your friends? Not approvingly" (00:02). This imagery sets the stage for her argument that declining alcohol consumption is more than a fleeting trend—it's a fundamental transformation within the industry.

• Historical Consumption Trends:

  • Over the past decade in the U.S., alcohol consumption in volume terms has remained relatively flat.
  • Spirits have seen mid-single-digit growth in value terms, while beer has grown in the low single digits. However, both categories are currently on a decline (00:02).

• Cyclical vs. Structural Decline:

  • The core debate revolves around whether the downturn is cyclical—a temporary phase influenced by factors like economic pressures—and structural, indicating long-term, permanent changes.
  • Sarah asserts, "We acknowledge that the consumer is under pressure right now, but we equally see long term structural pressures that are starting to play out" (00:30).

Key Factors Driving the Decline

Sarah identifies three primary factors contributing to the reduced alcohol consumption:

1. Increased Moderation by Younger Drinkers (Gen Z):

   • Generational Shift:
     • Gen Z (born between 1997 and 2012) are drinking significantly less than previous generations at the same age.
     • Today's 18 to 34-year-olds consume 30% less alcohol than their counterparts two decades ago (01:20).
   • Long-Term Trend:
     • This decline isn't a temporary blip from events like the COVID-19 pandemic or economic downturns but a persistent trend that predates these factors.
     • Importantly, Sarah clarifies, "This isn't the case of abstinence as in the case of tobacco, but moderation" (01:15).
   • Shift in Spending:
     • Younger generations are allocating more of their beverage budget towards soft drinks rather than alcoholic beverages.

2. Aging Population:

   • Demographic Changes:
     • The current 45 to 55-year-old demographic, who consume the most alcohol, is aging. Over the next two decades, physiological factors will lead to reduced alcohol consumption.
     • As people age, their bodies become less capable of metabolizing alcohol, and the use of prescription medications increases in the over-65 age group (02:45).
   • Impact on Consumption:
     • The aging of Gen X will result in a larger population over 75 years old, who generally consume much less alcohol, thereby disproportionately reducing overall alcohol consumption (02:45).
   • Additional Factors:
     • Adoption of GLP1 weight loss drugs is on the rise, further influencing drinking habits.
     • There is a growing negative perception of alcohol's health implications, aligning with broader health and wellness trends.

3. Health and Wellness Trends:

   • Acceptance of Non-Alcoholic Beverages:
     • There is increasing acceptance and demand for non-alcoholic alternatives, driven by improved product quality and wider distribution.
     • Low and Zero-Alcohol Alternatives:
       • These beverages are capturing a larger market share. Specifically, non-alcoholic beer has nearly doubled its share of U.S. beer retail sales since 2021, now accounting for about 85% of the non-alcoholic market (03:15).
       • The growth rate for non-alcoholic beer is robust, exceeding 20%, suggesting continued expansion (03:15).
     • Market Adaptations:
       • More mocktails are appearing on menus, and zero-alcohol beer options are being introduced on draft in pubs, reducing the stigma associated with abstaining from alcohol (03:20).

Implications for the Beverage Industry

Sarah concludes that the evidence points towards structural challenges for alcohol makers:

• Earnings Pressures:

  • The decline in alcohol consumption is not merely a temporary setback but a long-term issue that has been developing even before the COVID-19 pandemic (04:30).
  • These structural changes are expected to persist, impacting the profitability and growth prospects of alcohol manufacturers.

• Future Outlook:

  • As the trends continue, alcohol producers may need to adapt strategically by diversifying their product lines to include more non-alcoholic options and catering to the changing consumer preferences.

• Closing Insight:

  • "We think earnings pressures on alcohol makers are not simply cyclical, but structural. They've been underway even prior to Covid and looking to the future, we think they're here to stay." (04:30).

Sarah wraps up the episode with a nod to the shifting landscape, implying that those within the beverage industry—and investors looking at it—must recognize and respond to these enduring changes.

Conclusion

The episode "Is the Beverage Industry Drying Up?" provides a thorough examination of the declining trends in alcohol consumption in the U.S., attributing them to generational shifts, demographic changes, and rising health and wellness consciousness. Sarah Simon effectively argues that these factors are creating a structural decline in the beverage industry, necessitating strategic adjustments from alcohol manufacturers to stay relevant and profitable in a changing market.

Notable Quotes:

• "This isn't the case of abstinence as in the case of tobacco, but moderation." — Sarah Simon (01:15)
• "We acknowledge that the consumer is under pressure right now, but we equally see long term structural pressures that are starting to play out." — Sarah Simon (00:30)
• "We think earnings pressures on alcohol makers are not simply cyclical, but structural. They've been underway even prior to Covid and looking to the future, we think they're here to stay." — Sarah Simon (04:30)

Disclaimer: The podcast content is informational and does not constitute financial, legal, or tax advice. Listeners should consider their personal circumstances before making financial decisions.