BREAKINGVIEWS-Big Booze speeds towards low-growth tobacco status

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

By Aimee Donnellan

COPENHAGEN, Jan 7 (Reuters Breakingviews) - Alcohol giants have a hazy future. Late last week, the U.S. surgeon general said beer and spirits cause cancer and should carry health warnings. The wider trend has echoes of the historic backlash against Big Tobacco, and appears to be partly factored into brewers’ depressed valuations. If the trend for less drinking continues, higher-rated spirit makers like $70 billion Diageo DGE.L and $30 billion Pernod Ricard PERP.PA will suffer too.

Big Booze has had few reasons to party lately. Health concerns mean young would-be drinkers are abstaining. In a recent UK survey, 36% of adults under 25 said they were non-drinkers. In France, the home of champagne and fine Burgundy, the European Commission said in 2023 that wine consumption was on course to drop 15% year-on-year. More worryingly, in the giant U.S. market, only 62% of adults under the age of 35 say they drink, down from 72% two decades ago, based on Gallup research.

This bitter reality is showing up in the revenue of the world’s largest drink makers. Carlsberg’s CARLb.CO sales volumes declined in key markets like China, the United Kingdom and France in the third quarter of 2024. Diageo’s volumes were down 4% in its fiscal year that ended on June 30, 2024. Booze bosses like $90 billion Anheuser-Busch InBev’s ABI.BR Michel Doukeris may reckon they have the means to weather this storm. All of the big drink makers have launched low- and no-alcohol products – like Heineken 0.0, Molson Coors’ Cobra Zero and Gordon’s 0.0% gin from Diageo.

Yet investors are now treating the brewers, at least, similarly to the other cancer-causing vice. Beer stocks trade on 12 times forecast earnings, according to Breakingviews calculations using data for Heineken HEIN.AS, AB InBev, Carlsberg and Molson Coors TAP.N. That’s close to Big Tobacco’s equivalent multiple of 10.6, based on the average for British American Tobacco BATS.L, Philip Morris International PM.N, Imperial Brands IMB.L and Altria MO.N.

Spirit makers Diageo and Pernod Ricard are still more richly valued, at 16 times forward earnings on average, but that’s down from a valuation multiple that almost always exceeded 20 between 2018 and mid-2023, based on LSEG Datastream figures. The risk is that there is further for these groups to fall. By 2027, spirits companies will have the same 5% organic revenue growth rate as tobacco firms, based on analyst estimates gathered by Visible Alpha and which exclude the effects of M&A and currency swings.

Of course, the new surgeon general of U.S. President-elect Donald Trump’s administration could take a different view to the outgoing one. But perhaps not: both Trump and his health secretary nominee Robert F. Kennedy Jr. are teetotal. In any case, consumers are already increasingly shunning booze without the scary health labels. That’s enough to keep alcohol investors in low spirits.

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CONTEXT NEWS

Alcoholic drinks should carry a warning about cancer risks on their label, the U.S. surgeon general said on Jan. 3.

U.S. Surgeon General Vivek Murthy said alcohol consumption increases the risk of at least seven types of cancer but most consumers remain unaware of this.

Murthy also called for a reassessment of guidelines for alcohol consumption limits, so that people can weigh the risk when deciding whether or how much to drink. U.S. dietary guidelines currently recommend two or fewer drinks per day for men and one drink or fewer per day for women.

(Editing by Liam Proud and Oliver Taslic)

((For previous columns by the author, Reuters customers can click on DONNELLAN/
Aimee.Donnellan@thomsonreuters.com))