The adoption of GLP-1 drugs has caused a shift towards healthier habits, with consumers trading in Friday nights at the pub for a Saturday morning park run.
The trend has had consequences for alcohol stocks, with Fundsmith Equity manager Terry Smith noting in a recent annual letter: “We suspect the entire drinks sector is in the early stages of being impacted negatively by weight loss drugs.
“Indeed, it seems likely that the drugs will eventually be used to treat alcoholism such is their effect on consumption.”
However, Troy Asset Management senior portfolio manager James Harries argues the longer-term effects of this trend on alcoholic drinks companies are not yet fully understood, and could provide an opportunity for investors who hold faith in the market.
“We have seen widespread adoption of GLP-1s and we have seen that people who are on them do slightly change their behaviour,” he says. “They do slightly reduce their spending on goods such as confectionary and alcohol, and they slightly increase their spending on healthier items.
“This has led to a big change in the relative valuation of some of these businesses. PepsiCo is good example, which we own.”
Over the year to 24 February, PepsiCo’s share price has dropped 7.4%.
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The company is among the top 10 holdings in the £580m Trojan Global Income fund, which Harries manages alongside portfolio manager Tomasz Boniek.
The fund itself is a defensive income strategy, which aims to provide investors with a low volatility portfolio and a steady income.
Widespread adoption
Troy’s Harries argues that the behavioural changes brought about by GLP-1 adoption may be short-lived, creating a potential opportunity in spirits companies.
“We know adoption of GLP-1s has been quite widespread, and I suspect that it is actually much higher than people already realise, because it isn’t just being accessed through the NHS. Everyone’s desperate to get it, and so the take up rate is really quite high.
“You could argue that the impact hasn’t been seen materially yet globally in the consumption of many of these goods and services that consumer stakeholder companies produce.
“Further, we don’t really know the extent to which it changes human behaviour in the long term. In the short term, you see a shift in behaviour.
“My bet is it doesn’t change human nature very much longer-term. It would be an amazing thing if that happened. At the margin, it’s probably manageable. We’ve seen a big move in valuations, which suggests that from here, things could be a lot better.”
He adds that the best examples are in spirits companies, which boomed during Covid as consumers stocked drinks cabinets with increased spending on spirits.
“I’ve seen various companies described as slow-moving consumer goods, because you consume a bottle of spirits over quite a long period of time. We’ve had the post-Covid boom, and a mini-bust, if you like, which hasn’t worked through inventories.”
However, GLP-1s are not the only challenge the sector faces. The willingness of consumers to spend has also varied after the pandemic.
“We’ve had inconsistent demand from consumers as they have been working through their Covid savings.
“That’s probably from lower consumption as well, but we think these are cyclical factors that will pass.”
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Meanwhile, younger people are also drinking less than previous generations, which is a structural change that spirits companies are facing.
“It’s early days, but it has been suggested that younger people, as they get older, they change their habits and become more normalised – notably, when they get a job and they have a child,” Harries adds.
“Long term, we think spirits are probably just fine. The suggestion is that GLP-1s reduces the consumption of alcohol and all sorts of bad food in the short term, but I’m sceptical that it can change people’s desires forever globally.
“Put together, it means that if all of those factors turn out to be some of the truth, but not the whole truth, then this is a really good opportunity right now.”