Focusing workplace gatherings around alcohol is not considered inclusive at a time when younger generations do not embrace it as enthusiastically as their older peers.
This is not the only sign that alcohol’s appeal is faltering. A recent survey of university students showed they are increasingly prioritising the gym over the bar. The ‘sober curious’ movement is growing, whereby adults practise a more mindful and responsible use of alcohol. There are even alcohol-free bars popping up across the country.
These types of social shifts have investment implications. An investment portfolio should always look forward rather than back – as investors in Palm Pilot, Blackberry, or Nokia have found out to their cost. Investors need to understand what a company might do in the future, rather than simply looking at what it has done in the past.
So you don’t want a portfolio full of drinks companies if we’re about to give up alcohol, or confectionary companies if we’re all about to give up chocolate, or even a technology platform if we’re about to give up social media.
This phenomenon has been evident as the use of weight-loss drugs has become widespread. Investors have started to worry that this will impact demand for food, particularly fast food, and there has been some weakness in the share prices of these companies.
Drinks companies have certainly been weak. Diageo’s share price is down 9.5% this year. That compares to a rise of 7.8% for the FTSE 100. Fever-Tree is down 10.6%, Pernod-Ricard is down 19.6%, while Stella Artois’ owner Anheuser-Busch InBev is down 5.1% and Heineken is down 11.7%.
It has been no better at the luxury end. Jean-Jacques Guiony, the CFO of LVMH, recently said in response to declining Champagne sales: “Champagne is quite linked with celebration, happiness, etc. Maybe the current global situation, be it geopolitical or macroeconomic, doesn’t lead people to cheer up and to open bottles of Champagne.”
Opportunities remain
However, David Coombs, manager of the Rathbone Strategic Growth Portfolio, has used the fallen share price to add to his holding in the luxury conglomerate throughout July.
But there are a number of factors at work in the weakness for drinks companies – and it may not be because everyone has suddenly embraced sobriety.
First, it is worth noting that there are still some success stories – Marston’s plc, for example, has seen its share price jump 28.3% this year. The team running the Unicorn UK Smaller Companies fund made a decent profit from its sale of City Pub Group to Young’s in November 2023.
Equally, investors need to consider the recent history of consumer staples companies – which includes the major drinks manufacturers. By and large, these companies had an astonishing run during Covid. Remember the view that, during the pandemic, people either became ‘hunks, chunks or drunks’?
Turns out a lot of people favoured the latter, giving drinks companies a boost. This sent share prices soaring, but left a nasty hangover of inflated valuations.
A number of fund managers are looking at the sector again. For example, Ben Peters, fund manager for the IFSL Evenlode Global Income fund, backs Diageo, which is around 2.7% of the fund.
He also holds LVMH, saying its performance versus the rest of the luxury goods sector is reassuring, in spite of the relative weakness of the Champagne sector.
Peters says of the consumer sector more broadly: “Margins have now recovered strongly after the challenges of the past few years, enabling continued reinvestment in their brands through marketing. There has been much focus on the health of the US consumer recently, and while discretionary spending appears like it could be under some pressure, the core of people’s wallets seems robust.”
The potential change in how we consume alcohol presents an opportunity for Nick Clay, manager of the TM Redwheel Global Equity Income fund, who actively seeks out controversy and aims to understand whether its nature is temporary (and therefore an opportunity) or permanent (something to avoid). The fund currently features Diageo in its top 10 holdings.
There is also consolidation in the sector. Carlsberg is believed to be considering a third bid for Britvic, after its initial bids were dismissed as too low. This type of M&A activity can be supportive for share prices.
These companies often do well when there are some nerves around the outlook for the economy, as there are today.
Alcohol consumption is some way from dying out completely, and drinks companies have shown themselves to be adept at turning to low-alcohol alternatives – a recent survey showed a net 8% of consumers increasing their intake of low-alcohol drinks over the past year (source: Innova Market Insights, 5 July 2024).
That’s why fund managers are not yet ‘calling time’ on this part of the market.
It’s been a difficult couple of years and the sector is not without its challenges, but universal sobriety is not imminent and there are still parts of the market that can gain ground. Nevertheless, it is a reminder to keep an eye on the direction of social trends when making investments.
Juliet Schooling Latter is research director at FundCalibre and Chelsea Financial Services
