It might be a sobering fact, but drinking rates are declining globally, particularly among young people. Some like to call it the rise of ‘Generation Sensible’.

Historically, peak alcohol consumption used to occur between the ages of 20 and 34. This is the age millennials are today. But data shows they’re drinking less than their parents did, and also less than their grandparents did at their age.

And this trend looks set to continue into Generation Z and further generations to come. The trend’s not new and it is something researchers have been watching for some time.

Young people are drinking less

Abstinence rates among the 16 to 24s are on the rise, from 10 per cent to nearly 25 per cent between 2001 and 2016. It’s now estimated that over 20 per cent of the UK population doesn’t drink at all, but that’s nearly 30 per cent for those under 24.

As a millennial myself, I believe there are three main factors contributing to this decline.

The first is health. Younger generations tend to be more concerned about their health and wellbeing than previous generations. This sees many of them drinking less, drinking non-alcoholic beverages, or favouring booze alternatives, like cannabis.

Globally, there’s also been a rise of ‘positive sobriety’ or ‘mindful drinking’ movements. Dry months like ‘Dry July and ‘Sober October’ have grown in popularity, as younger people develop a healthier attitude to drinking.

There’s also been a reaction against over-drinking. Many younger people are seeking more control in the face of constant social-media surveillance. Unlike previous cohorts, their nights out are documented through photos, videos, and posts across social media, where they’re likely to remain for the rest of their lives. Over-drinking is something many seek to avoid.

Prices hit youth hard

Finally, the steady rise in alcohol prices over the past few decades puts an increasing dent in the wallets of young adults.

According to the UK’s Institute of Alcohol Studies, as prices of alcohol increase, volumes consumed decline. However, the ready-to-drink mixes (RTDs) which are most associated with the younger demographic have one of the highest levels of price elasticity across all alcohol types.These trends have serious implications for alcoholic beverage companies globally.

In Western markets, we’re not only seeing a generational drinking decline, we’re also seeing a shift happening among alcoholic beverage categories.

Sprits, in particular tequila and gin, are seeing accelerated growth as younger drinkers perceive these to be more premium, and healthier, alternatives to beer and wine.

Sprits consumption globally, as a percentage of total volume, has increased from 45 per cent a decade ago, to over 55 per cent today. The lion’s share is taken from beer.

While this rising tide of teetotallers may be scary news for alcohol companies, it’s led to industry innovation. It’s created opportunities in several ‘alcohol alternatives’, as companies try to diversify their portfolios and expand their markets, aiming to appeal to those avoiding alcohol, or wanting to cut down.

The rise of the non-alcoholic spirit

Big beverage companies are buying up or investing in creative products catering to this growing trend. Take Seedlip, the world’s first distilled non-alcoholic spirit, which was recently bought by alcohol conglomerate, Diageo.

Diageo generates over US$12 billion in revenue from beer, wine and spirits. The addition of this alcohol-free alternative into its portfolio reinforces the huge opportunities of owning brands that cater to the more conscious drinker.

Other non-alcoholic alternatives, like the slightly fizzy, fermented tea drink kombucha – not only non-alcoholic but with extra gut health properties too – are rapidly being adopted.

Heineken, the 150-year-old beer giant, recently launched a non-alcoholic beer alternative. Heineken 0.0 is now available in more than 50 markets globally, and has rapidly gained traction, exceeding financial market expectations.

Even Coca-Cola has jumped on the bandwagon, introducing a range of non-alcoholic cocktail-inspired drinks, even though its portfolio of brands is non-alcoholic anyway.

Cannabis curveball

Recreational cannabis is quickly becoming an alcohol alternative. Its popularity, plus legalisation in some countries and US states, has led to many cannabis companies commanding valuation premiums, as investors forecast a boom in this growing market.

The world’s largest cannabis producer, Canopy Growth (TSX:WEED), generates NZ$300 million in revenue, has no earnings, but is valued at over NZ$14 billion. That shows investors are hugely optimistic about its future.

The cannabis environment may change in New Zealand too in the future. The government’s Medicinal Cannabis Scheme aims to enable commercial growing of medicinal cannabis and the creation of medicinal cannabis products. Public consultation closed in August. A handful of Kiwi cannabis companies are waiting for this outcome.

And in the 2020 election, Kiwis will vote on legislation to legalise recreational cannabis.

Gen Z brings challenges

Millennials are shaping the alcoholic beverage industry today, but in terms of innovation and allocation of capital, companies should be more worried about Generation Z.

Alcohol intake historically peaks between the ages of 20 and 34. So in 10 years, Generation Z will account for nearly all of this peak consumption age range.

This generation is expected to be even more sensible, which means more money will flow into non-alcoholic alternatives.

Investors should be looking at companies with management teams that can be nimble and adapt their business models or portfolios to take advantage of these increasingly ‘sensible’ generations.

Published 13 December 2019

This article does not contain any financial advice and has not taken into account any particular person’s circumstances. Before relying on it, we recommend you speak with a financial adviser. This story reflects the views of the contributor only. Content comes from sources that we consider are accurate, but we do not guarantee that the content is accurate.