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Dependability and growth have been the two key watchwords normally associated with the Diageo (LSE: DGE) share price. But not anymore, it would seem. Among a slew of societal cultural shifts, ownership of big-named brands does not carry the weight it once did. The question for long-suffering shareholders is just what will it take to turn it around?
Societal trends
The stock is under attack today from multiple angles. Firstly, the legalisation of cannabis in many US states has seen a rise in THC hemp-derived beverages. Secondly, there’s been a surge in use of weight loss drugs, which potentially dull appetite for alcohol.
Personally, I view these two trends as mostly noise and not supported by conclusive data. In any case, it is just way too early to assess their potential implications on long-term alcohol usage.
Of much greater concern to me is moderation trends, particularly among Gen Z.
Alcohol moderation
When one talks about alcohol moderation, I think it is very important to first of all state that the phenomenon is nothing new. Between 2014 and 2024, total beverage alcohol has declined at a compound annual growth rate of 2.2%.
The thing about the Gen Z cohort is that they have been the group most impacted by the cost-of-living crisis. A night out on the town these days is way more expensive than it was for previous generations.
My point is this: moderation trends could simply be a function of squeezed wallets. The big unknown of course is whether the trend among Gen Z will reverse once the economy starts to pick up again.
Product innovation
Another point I would make about alcohol moderation trends is that it plays into Diageo’s core strategy of premiumisation.
In the next five years, Gen Z is going to be the largest cohort coming in to the legal drinking age. Diageo’s own research shows that they are “drinking better, not more”.
In response, the company is at the forefront of a major product innovation drive. Ready-to-drink (RTD) spirits have been one such innovation. Their popularity among younger drinkers have been a revolution. Indeed, I would argue that the introduction of such products has been a key reason why this cohort is being introduced to spirits at a younger age than previous generations.
Bottom line
I think it is very important for any investor considering buying Diageo’s stock is to take a step back and consider the merits of societal trends, firstly in isolation, and then in totality. By doing so, I think that will provide a much clearer picture of its overall merits.
Is alcohol the new tobacco industry? Again, I would say it is way too early to make such sweeping generalisations.
I have long argued that the stock was a falling knife, and I am relieved I stayed away. But my views now are slowly starting to change. A price-to-earnings ratio of 13 for a stock with the brand power and international reach of Diageo is beginning to look mispriced. That is why the stock has moved onto my watchlist.
