Bernstein's Nadine Sarwat breaks down why Gen Z is shifting away from alcohol

Exclusive CNBC data showing younger generations are not very optimistic about the economy. Our youth and Money survey in the US founds that 44% feel pretty bad about the job market, 68% say homes are available but not affordable, and they’re being hit hard by inflation, with 54% saying they’ll feel it the most when purchasing basics like food. Well, one thing younger Americans are not apparently spending as much income on is alcohol. Inflation could be partly to blame, but Bernstein says there’s more to it. Laying out a few reasons why Gen. Z is drinking less. In a new note is the analyst behind that research, Nadine Sarwat, who joins us now to discuss. Nadine, welcome. Good to see you. How much less are Gen. Z people drinking? And is there any suspicion that once they pass through this phase of dryness, let’s call it, they might return to, to what we would say more traditional drinking patterns? Thanks for having me. That is the question on every investor’s mind at the moment. So what does the data tell us on drinking? Well, the first thing is that underage drinking has been falling in the US for decades. This is great from an ESG perspective, but it’s not new and shouldn’t be what investors focus on. So what is new is that over the last few years, 21 to 22 year olds have been seeing modest declining alcohol consumption. Yet over that period the frequency of drinking amongst 23 to 30 year olds has held constant. So crucially, this implies once younger consumers enter full working adulthood, they appear to revert to historical trends in consumption patterns for now. So let’s ask what is if anything, replacing traditional alcohol as as the intoxicant of choice, if anything? Or is this more a movement toward, I want to take care of my body, I don’t want to put things into it that potentially could damage my body. Yeah, I’m not sure I would say intoxicant of choice. I like to to usually say social lubricant of choice. That’s a great question. What’s driving the reduction in that 21 to 20 year old cohort? A couple of things to highlight. First, the awareness about risks of alcohol has increased over the last decade and that’s especially driven by younger consumers. But the data is mixed and we found conflicting views depending on what survey we looked at. And remember, just because perception of risk increases doesn’t mean we actually change our behavior because of it. Now the second thing to your point, substitution. We’ve seen a rise in legal cannabis in the US as an alternative to alcohol, so according to our analysis, legal cannabis could be impacting US beer volumes by about 75 basis points as a headwind in states where recreational cannabis is legal. 50% of the US population lives in a state with legal recreational cannabis. So at the national level that would be about a 30 basis points headwind. But what else is going on? You know, I think it’s important to highlight that consumers drinking less could simply be a byproduct impact. In other words, consumers attitudes towards alcohol might be unchanged, but macro headwinds are affecting the occasions that alcohol is usually consumed in. And in the chart that was shown prior to me being on just then touched on a lot of those. The economic burden on young Americans has increased significantly, whether from inflation or the rising student loan debt burden. The nature of socializing has dramatically changed for young Americans. Those under 22 are spending less and less time interacting with friends. Also, we see that more young Americans are living at home than ever before. And my hunches consumers are far less likely to want to drink and entertain their friends or partners when they’re living with their parents. And finally, and let’s remember, you know, today’s young consumers came of age during COVID. Many schools did this virtually. They missed out on crucial years of social bonding with peers. Bars and restaurants were closed. And so it’s really once in a lifetime external disruption that we’re seeing for young consumers today. Nadia, we have to go. But of the companies you cover because you cover all of the major ones who’d be affected by this, are they seeing it first hand? Not yet. The impact is slow and I’d say we’ve had a lot of corporates and investors reach out to us for the fact based element of our analysis that they appreciated since we dug into the facts, but nothing so far to cause huge alarm, all right, maybe because they’re reverting back, you know, as they get a little bit older for now. Nadine, thanks. We appreciate it. Thanks so much, Nadine Sarwat.