- Spirits volumes in the US have declined for four straight years — an unusual break from historical resilience, including during the 2008-2009 financial crisis when volumes kept growing as consumers traded down to cheaper at-home drinks; this time they aren’t substituting, they’re cutting back, even though retail spirits prices are up only 9% in five years while bar cocktail prices have surged 29%, with $20 cocktails becoming the norm in many US cities.
- Diageo and Pernod Ricard now trade at earnings multiples below British American Tobacco and Altria — a dramatic compression from the premium spirits commanded over tobacco as recently as 2017; Diageo’s P/E is at 2009 levels; the question is whether alcohol is entering a tobacco-like secular decline driven by generational and pharmacological headwinds, or experiencing a cyclical trough driven by cost-of-living pressure that will normalize as disposable income recovers.
- Demand headwinds are multiple and reinforcing: the Gallup share of Americans who say they drink hit an all-time low of 54% in 2025; Gen Z is drinking more moderately than prior generations; GLP-1 weight-loss drugs suppress alcohol appetite alongside food; THC-infused beverages provide a legal alternative buzz in legalized states; and Oura rings and Fitbits have made alcohol’s sleep disruption effects measurable, accelerating moderation among health-conscious consumers of all ages.
- One conflicting signal: ready-to-drink canned cocktails are booming at 20-30% annual growth, with AB InBev’s Cutwater Spirits leading the charge at $25 for a 12-pack vs. $20 for a single bar margarita; Bernstein analyst Nadine Sarwat says RTD outperformance and demand for smaller pack sizes suggest “at least part of the drop in volumes is caused by squeezed budgets, rather than abstinence” — which would make the decline cyclical rather than secular and the current tobacco-level valuations a potential entry point.
What Happened?
Shares in Diageo (Casamigos), Pernod Ricard (Jameson), and Brown-Forman (Jack Daniel’s) have compressed to valuations that now rival or trail traditional tobacco companies — a striking reversal from the premium multiples spirits stocks commanded a decade ago. Four consecutive years of declining US spirits volume have driven the de-rating. Unlike the 2008-2009 downturn, consumers aren’t trading down to cheaper at-home options; they’re simply drinking less. Wellness culture, GLP-1 adoption, Gen Z moderation norms, $20 cocktails, and legal cannabis alternatives have created a multi-front headwind that the publicly listed spirits companies have been slow to counter. The fastest-growing alternative — RTD canned cocktails — is dominated by beer companies and private brands rather than the Diageos and Pernods of the world, who are reluctant to enter a lower-margin category that could also prove a passing fad like hard seltzer.
Why It Matters?
The valuation question is binary: are spirits in secular decline (tobacco analog) or cyclical trough (value opportunity)? The tobacco analogy is imperfect — alcohol lacks cigarettes’ regulatory prohibition risk and social stigma trajectory, and emerging-market demand remains healthy for Diageo in India and elsewhere. But the domestic structural headwinds are real and compounding. If the volume decline is even partially budget-driven (squeezed consumers opting out of $20 cocktails but still drinking at home), valuations at 2009 P/E lows offer meaningful upside when purchasing power recovers. If the decline is genuinely generational and pharmacological — GLP-1 adoption still accelerating, Gen Z moderation norms spreading to older cohorts — then tobacco-like multiples may be appropriate and the value trap risk is high. Diageo’s new CEO is expected to announce a fresh strategy later this summer, including more affordable product tiers, which will be the first real test of whether management has a credible answer.
What’s Next?
Three data points will resolve the bull-bear debate: Diageo’s new CEO strategy announcement (late summer), the trajectory of GLP-1 penetration in the US over the next 12 months, and whether RTD canned cocktail growth plateaus as hard seltzer did. For investors, the key distinction is at-home vs. on-premise volume trends: if retail spirits volumes hold while bar and restaurant volumes continue declining, it supports the price-elasticity thesis and increases the probability of a cyclical recovery when cocktail inflation moderates. If retail volumes also continue deteriorating despite near-flat prices, it validates the abstinence thesis and makes the current discount appropriate. The risk/reward at tobacco-level multiples is compelling if the secular bear case is wrong — but the margin for error is thin in a category where the generational, pharmacological, and competitive headwinds are all pointing in the same direction.
Source: The Wall Street Journal
