Are global brewers and tobacco companies in permanent decline?

Author: Johan de Kock.

Over the last 12 months the share prices of British American Tobacco (BATS) and Anheuer-Bush InBev (ABI) lost more than a quarter of their value in pound and euro terms. The appreciation of the rand led to an even bigger loss for South African investors.

Both BATS and ABI experienced a decline in volumes of their main products. The volume of cigarettes sold is declining by 1 – 1.5% annually and ABI announced a decline in volumes sold in their latest quarterly update. It is easy to attribute the declining volumes of cigarettes and beer to the same factors, but the two industries face different challenges.

Governments are successfully curbing smoking by taxing tobacco products, and  anti-smoking campaigns which warn of the dangers of smoking, has had the desired effect. The health authorities have been so successful that the major tobacco companies are experiencing a decline in volumes. Further restrictions are on the horizon – the US Federal Drug Administration last year announced that they will issue regulations on the nicotine content of tobacco products and regulate new generation products (vapor and heat-not-burn tobacco products).

The younger ‘millennial’ generation, potentially the new consumers of tobacco and beer, are resorting to different products and their spending patterns are different from previous generations. In today’s mass market, consumers are chasing a unique experience, and social media has changed the way people behave and how they consume products.

Alcohol consumption is driven by the preferences of brand-conscious 18 – 35-year olds who are in their prime consumption years. According to research done by the UBS Evidence Lab, the top four drivers of brand preference for millennials, consistent with the wider population (though in a slightly different order), are:

#1- recommendation by friends/family;
#2 – taste/flavour;
#3 – trust; and
#4 – style.

The global brewers are losing market share to other alcoholic drinks, such as craft beers, spiked seltzers, flavoured and unique gins and premium tequilas.

Increased regulations to combat alcohol abuse have yet to be imposed on the alcohol industries, while the tobacco industry has already been relatively successful in navigating increased taxes and more restrictive regulations. The new generation of tobacco products (e-cigarettes and heat-not-burn cigarettes) promise lower health risks and growth in sales; but although initially successful, it seems that it will take time for consumers and regulators to be convinced of the perceived benefits.