US consumers becoming 'more thoughtful' to alcohol options

Spirits are gaining their share in the US alcohol market as consumer demographics — both men and women — are diversifying their palettes and becoming more open to what they drink.

Nadine Sarwat, Bernstein Director of American Alcoholic Beverages & Cannabis, outlines the structural shifts enabling spirits to rise above beer consumption, as well as how GLP-1 weight loss drugs are weighing on alcohol sales.

"Suffice to say a lot of consumers feel spirits are morale lined with health and wellness and calorie goals, when you look at all of that — even though it's been a tough year — a lot of the same structural factors that drive consumer choices are still here today," Sarwat says.

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Editor's note: This article was written by Luke Carberry Mogan.

Video Transcript

BRAD SMITH: Saucy stocks are getting some revitalized attention among beverage analysts. Brown-Forman caught a downgrade this morning from Morgan Stanley, but still remains an attractive stock. At least, that's what our next guest believes. For more on the alcohol sector, we're joined by Nadine Sarwat, who is the Bernstein Director of American Alcoholic Beverages and Cannabis.

Nadine, great to have you here with us this morning. First and foremost, we've got to think about this industry more broadly and the consumer appetite or taste profiles that continue, especially, in this environment, where there is more thought process to discretionary purchases. How is that making its way into this sector?

NADINE SARWAT: Yeah. Hi. Thanks for having me. So you're absolutely right in that consumers are being more thoughtful. 2023 was really hard for US alcohol more generally, including spirits, beer, and wine.

But what we've seen is that a lot of those structural trends that have existed for the past decade are still existing, even within a tough year. Namely, that spirits continues to gain share from beer. That's for three structural reasons.

First, women are becoming an increasing proportion of the drinking population versus 10 years ago. And they prefer spirits to beer. Second of all, men are drinking differently today. So 20, 30 years ago, your average male American would just drink beer. Now, they're enjoying a bottle of wine with their partner over dinner, still drinking beer while watching sports, but, also, enjoying cocktail out with friends.

And the third point is health and wellness. Now, we could sit here and debate which of the three types of alcohol, I just listed, are healthier. But suffice to say, that a lot of consumers feel spirits are more aligned with their health and wellness and calorie goals.

So when you look at all of that, even though it's been a tough year, a lot of the same structural factors that drive consumer choices are still here today.

SEANA SMITH: So Nadine, given that there's been lots of talk about GLP-1, the impact that that's having on consumer staples on the food categories, what about alcohol? Because that's been lost a little bit within the conversation.

NADINE SARWAT: You're absolutely right. Well, the first assumption we'd have to make is that GLP-1's does have a negative impact on alcohol consumption. So far, studies have only been done on rodents. But even if we look at anecdotal surveys, Bernstein conducted one as well, we do find that there is some hit to alcohol consumption.

Now, the real question, though, is does this hit what we have called the super user of alcohol? If you think about soda companies or sugary or salty snacks, what really places them at risk from GLP-1's is the fact that the GLP-1 target consumer, so the average obese American, will heavily overlap with the consumer, who disproportionately eats or drinks the majority of those soda, sugar, or salty snack products.

In alcohol, we did the work. We dug through a huge amount of academic studies. And we found that that overlap simply doesn't exist. At sometimes, it's neutral, if not slightly negative. Now, that's not to say that you wouldn't get a GLP-1 hit, but it will not be in the magnitude of some of those other CPG stocks.

BRAD SMITH: Hard seltzers, spiked drinks, who is the strongest play in that category from your perspective?

NADINE SARWAT: Yeah. So the category you're referring to is often called the fourth category. It's not beer. It's not wine. It's not spirits. It's the intersection of all three. Now, in our coverage, really, who continues to stand out is Boston Beer. They are the maker of truly hard seltzers. Now, that brand is in decline.

But the main brand that they have today, 50% of their volumes in Nielsen tracked channels is Twisted Tea. And they have had successful four waves of innovation, where they've either been the first mover or a fast follower.

Now, we don't think that that's enough to like the stock today. We have a market perform on Boston Beer. But it definitely stands out as the one with the best track record.