Drinks Giants Face Uncertain Future Amidst Cyclical and Structural Challenges

The world's largest drinks companies, Diageo and Pernod Ricard, have faced a difficult two years on the stock market, with Pernod Ricard's shares dropping nearly 60% and Diageo's falling over 40% since mid-2023. This downturn is largely attributed to a post-pandemic slump, bad weather, and inventory stocking issues in various regions. Low sales in Latin America have been particularly troublesome for Diageo, leading to a 5% year-on-year drop in profit in 2024. Analysts believe that while the current environment is tough, the pressures are largely cyclical, not structural. However, two significant structural factors are looming on the horizon: the reduced drinking habits of Gen Z and the impact of weight-loss drugs like Ozempic on alcohol consumption.

Key Takeaways:

• Since mid-2023, shares in Pernod Ricard have dropped nearly 60%, while Diageo's share price has fallen over 40%.
• Diageo's low sales in Latin America led to a 5% year-on-year drop in profit in 2024.
• Analysts believe that the pressures on the drinks companies are largely cyclical, not structural.
• Gen Z drinks 20% less than millennials, contributing to a structural trend of people drinking less from one generation to the next.
• The share of UK households with GLP-1 users, the active ingredient in weight-loss drugs, has doubled in the last year, potentially affecting alcohol consumption.
• Kantar has drawn a link between grocery sales and Ozempic usage, with analysts Fraser McKevitt calling it "a trend to keep an eye on".
• Veteran fund manager Terry Smith dumped his stake in Diageo in January, arguing that the rise of weight-loss drugs poses a threat to the alcohol industry.
• RBC analysts have called the reduced drinking habits of Gen Z and the impact of Ozempic "unquantifiable headwinds" for the industry.
• Premiumisation is seen as a long-term growth driver for the drinks industry, with brands adjusting to new, niche trends.
• Retail has also seen a shift to premium spaces and experiences in the last year, with 'premium' stores being one of the only retail winners.

Statistics:

• Shares in Pernod Ricard have dropped nearly 60% since mid-2023 (https://www.cityam.com/diageo-guinness-maker-warns-tariffs-could-offset-recovery/).
• Diageo's share price has fallen over 40% since mid-2023.
• Diageo's profit dropped 5% year-on-year in 2024 due to low sales in Latin America (https://www.cityam.com/diageo-guinness-maker-warns-tariffs-could-offset-recovery/).
• Gen Z drinks 20% less than millennials (Verushka Shetty, equity analyst at Morningstar).
• The share of UK households with GLP-1 users has doubled in the last year (https://www.cityam.com/analysts-draw-link-between-weight-losee-jabs-and-fall-in-grocery-sales/).
• Customers aged 25-34 who used Ozempic in the last 12 months were more likely to agree with the statement "I drink alcohol occasionally" (28.6%) compared to those who did not use it (23.1%) (Kantar).
• In the US, consumers are spending 22% more for 8% less in grocery baskets vs four years ago, driving weaker volumes (Jeffries analysts).

Sources:

• https://www.cityam.com/diageo-guinness-maker-warns-tariffs-could-offset-recovery/
• https://www.cityam.com/analysts-draw-link-between-weight-losee-jabs-and-fall-in-grocery-sales/
• https://www.cityam.com/analysts-draw-link-between-weight-losee-jabs-and-fall-in-grocery-sales/
• https://www.cityam.com/gen-z-are-leading-the-way-on-luxury-spirits/
• https://www.ncbi.nlm.nih.gov/search/research-news/19361/