Liquor Makers Need to Sober Up to the Decline in Teenage Drinking

Big liquor is betting on the U.S. even as alcohol consumption among under-21s is plummeting

Source: THE WALL STREET JOURNAL

By Stephen Wilmot

Oct. 10, 2017

Move over millennials: Today’s smartphone-obsessed teens, Generation Z, are the consumers of the future. Worryingly for liquor producers, they’re shaping up to be an antisocial lot.

The U.S. has been a highly attractive market for most liquor companies. Overall alcohol consumption in the country grew 15% over the decade through 2015, even as it shrank in Germany, France and the U.K. Population growth was the primary driver, but generational effects also helped as American millennials, who are now in their 20s and 30s, binged on cocktails and craft beer in particular.

The world’s largest liquor groups, London-listed Diageo DEO 1.15% and Paris-listed Pernod Ricard , PDRDY 1.69% put the U.S. front and center of their strategies. Not only does the market have a more reliable record of growth than in Europe or emerging markets; it is also disproportionately lucrative. The U.S. accounts for less than a third of Diageo’s sales but almost half its operating profits.

But what if this turns out to have been a demographic blip? Millennials, whom demographers define as being born between 1980 and 1995, constitute more than 65 million Americans, according to Census Department data. The Gen Z cohort, born from 1995 to 2010, numbers 62.5 million.

U.S. growth in unit liquor sales will slow to just 0.2% over the coming decades, from 1.5% historically, as the smaller Generation Z replaces millennials as the primary consumers of alcohol, say analysts at brokerage Berenberg.

Jean Twenge, a professor of psychology at San Diego State University who wrote a controversial 2006 book on millennials called Generation Me, published an analysis of the latest generation in August. iGen: Why Today’s Super-Connected Kids Are Growing Up Less Rebellious, More Tolerant, Less Happy-and Completely Unprepared for Adulthood describes how Americans born after 1995 are more likely to stay at home messaging friends on smartphones than they are to hang out in person. She argues they are growing up more slowly than their predecessors.

A benign consequence of this generational shift is that U.S. teenagers on average drink less than they did a decade ago. Only 20.3% of Americans engaged in underage drinking in 2015, according to the latest issue of the National Survey on Drug Use and Health, down from roughly 28.2% in 2005. Increased pot smoking has taken some of the slack.

This trend isn’t completely new. Health-conscious millennials had already started to imbibe fewer but better-quality drinks. Producers have consequently got used to “premiumization” strategies in the developed world: They drive sales growth by pushing up prices rather than pushing unit sales.

But the decline in underage drinking since the advent of smartphones is more dramatic. Unless stay-at-home teens suddenly blossom into wild 20-somethings, it could signal a gear shift in consumer tastes that companies will need to anticipate and adapt to.

Even as the U.S. packaged-food industry has entered a period of decline, liquor producers have continued to take the strength of the U.S. market for granted. They may need to plan for a more sober future.