Morgan Stanley’s Head of European Consumer Staples, Sarah Simon, discusses why aging populations, wellness trends and Gen Z’s moderation are putting pressure on the long-term outlook for alcoholic beverages.

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Welcome to Thoughts on the Market. I’m Sarah Simon, Head of the European Consumer Staples team. Today’s topic: Is America sobering up? Recent trends point to a national decline in alcohol use.

It's Wednesday, April 23rd, at 2pm in London.

Picture this: It's Friday night, and you're at a bar with friends. The drinks menu offers many options. A cold beer or glass of wine, sure. But how about a Phony Negroni. And your friends nod approvingly.

This isn't just a passing trend – we believe it's a structural shift that's set to reshape the beverage industry.

Overall alcohol consumption in volume terms has been relatively flat over the last decade in the U.S. - with spirits growing mid single digits in value terms and beer growing low single digits. But both categories are currently declining. The big debate is whether it’s cyclical or structural. We acknowledge that the consumer is under pressure right now, but we equally see long term structural pressures that are starting to play out. There are three key factors behind this trend: increased moderation by younger drinkers, an ageing population, and then broader health and wellness trends.

So let’s talk first about Gen Z – those born between 1997 and 2012. They're drinking notably less than previous generations of the same age. In fact, today’s 18-34 year-olds drink 30 per cent less than the same age group 20 years ago. And we think it’s pretty unlikely they will catch up as they get older. This isn't a temporary blip caused by the after-effects of COVID-19 lockdowns or economic pressures. It's a long-term trend that predates both of these factors. And importantly this isn’t the case of abstinence – as in the case of tobacco – but moderation. Younger generations are simply drinking less alcohol and allocating more of their beverage spending towards soft drinks.

Secondly, developed market populations are ageing. If we look at population data, we see it’s today’s 45-55 year old age group that drinks the most alcohol; and has exhibited the highest growth in consumption and spending over the last 20 years. However, over the next 20 years, this cohort is likely to cut back on drinking due to physiological reasons as they age. The body simply becomes less able to metabolize alcohol, and there’s much higher usage of prescription medication in the over 65 age group.

And in just the same way that this cohort was growing faster than the population overall over the last 20 years – because of the higher birth rate in the late 60s and 70s – in future, the aging of these GenX-ers will drive outsized growth in the number of people aged over 75, who consume much less alcohol. And so, the result is a disproportionate impact on overall alcohol consumption. And on top of this, there’s increased adoption of GLP-1 weight loss drugs that we’ve talked about previously. And increasingly negative perceptions of the health implications of alcohol – as the broader health and wellness trend takes hold.

On the flip side, there's also a growing acceptance of non-alcoholic beverages, driven by better products and broader distribution. We expect low- and zero-alcohol alternatives to gain a larger share of the market as a result. And we think beer looks particularly well-positioned; it already accounts for about 85 per cent of the non-alcoholic market overall. And this year in the U.S., non-alcoholic beer has nearly doubled its share of U.S. beer retail sales, compared to where it was in 2021. Now it’s still small, but the growth rate in the well over 20 per cent range, suggests that share gain will continue.

Meanwhile, we’re seeing more mocktails on menus and zero-alcohol beer on draft in pubs. All of this is further contributing to less stigma associated with not drinking alcohol. And all these trends add up to one conclusion, we think: earnings pressures on alcohol makers are not simply cyclical but structural. They have been underway even prior to COVID. And looking to the future, we think they’re here to stay.

So now, many more people can say cheers to that.

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