The alcoholic-beverage sector is losing its buzz, and caffeine is taking its place. Here’s how investors can profit

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The Virgin Mary, Dublin’s first non-alcoholic pub, opened earlier this month. You don’t have to be Irish to think this merits attention.

The new teetotaller’s paradise highlights one of the challenges facing the global booze business. In many countries, aging populations and healthier alternatives are putting a cap on liquor sales.

Combine that trend with industry consolidation and it becomes clear why the drinks industry is facing strong headwinds to growth. Peddling booze continues to be a steady money machine, but the prospects for expansion are looking much more limited than they once did.

Investors should take note. The beer, wine and spirits business was once as close to a riskless growth proposition as a shareholder could hope to find. Sales dependably swelled, even in economic downturns, and so did profits.

Those steady, assured gains no longer seem like such a sure thing, especially when it comes to beer. Over the past five years, some of the world’s biggest brewers – Anheuser-Busch InBev SA, Diageo PLC and Molson Coors Brewing Co. – have lagged behind the market.

What has done better? Think caffeine.

Since 2014, big purveyors of coffee, energy drinks and other stimulants have provided superior returns to the alcohol-fuelled giants.

To be sure, there are exceptions to this general rule. Constellation Brands Inc., which sells wine and spirits as well as beer, has managed to thrive while big brewers have stumbled. Still, the strong performance of the caffeine cartel should provide investors with something to mull while they’re sipping their Americanos.

Between the start of May, 2014, and May, 2019, a portfolio composed of equal parts Coca-Cola Co., Monster Beverage Corp. and Starbucks Corp. would have generated an annual average total return of 20.4 per cent in Canadian dollars, beating the S&P 500’s 16.1 per cent by a substantial margin.

By comparison, a boozy portfolio made up of AB InBev, Constellation Brands, Diageo and Molson Coors would have produced a total return of only 12.5 per cent a year.

There are several reasons to think caffeine will continue to offer better prospects for investors than alcohol.

Some of them are sociological. More and more people are working at cognitively demanding jobs, where the prospect of showing up at work the morning after a night of drinking with a foggy head isn’t appealing.

Tougher laws on drunk driving are another deterrent to alcoholic overindulgence. So are health concerns, especially as populations age in developed countries. A general shift away from carbs has been particularly bad news for beer makers, but attitudes toward all types of liquor appear to be changing.

“I think we’re at the beginning of a cultural shift in terms of people’s attitudes towards alcohol,” Vaughan Yates, a co-founder of the Virgin Mary in Dublin told the Financial Times. “We’re not saying don’t drink, what we’re saying is if you don’t want alcohol here is an alternative.”

For the global drinks industry, this isn’t welcome news. Several decades of acquisitions and mergers have narrowed what was once a host of large brewers and liquor producers into a handful of mammoth companies. With only limited prospects for further consolidation, these hulking enterprises now have to generate growth in-house by persuading consumers to buy more of their products, or shell out for higher-priced premium versions.

One sign of the shifting times is the willingness of big brewers to expand into non-alcoholic versions of their flagship products. AB InBev, Molson Coors and Heineken are all promoting non-boozy beers, hoping to position these brews as healthy alternatives to both traditional alcoholic beer and sugary soft drinks.

At least in the early going, however, the drinks giants have yet to encounter much success. Sales of “near beer” accounted for a mere 0.3 per cent of U.S. beer sales last year, according to Nielsen.

Investors may want to view brewers’ expansion into non-alcoholic beer as a cry for help. When an industry has to scramble for growth by gutting one of the key aspects of its traditional offerings, it is arguably time to look elsewhere for profits.

Caffeinated beverages offer one alternative. Admittedly, traditional soft drinks must wrestle with many of the same health concerns as beer, but energy drinks – sugary alternatives with even more of a caffeine punch – have soared in popularity. Monster Beverage (in which Coca-Cola owns a 17-per-cent stake) is the best-performing S&P 500 stock of this century, with more than a 60,000-per-cent gain since 2000.

From an investor’s perspective, coffee may be the best-positioned beverage of all. The black brew’s popularity is expanding in traditional tea-drinking countries such as China, but the room for further growth appears massive.

According to research firm Frost & Sullivan, the typical Chinese consumer bumped up his or her coffee consumption from 3.2 cups a year in 2013 to 6.2 cups a year in 2018. However, China’s nascent coffee habit still barely registers compared with levels in the United States, where people drink an average of 388 cups a year, or in Germany, where folks somehow put away an amazing 867 cups a year.

In developed markets, people aren’t necessarily increasing their java consumption, but appear willing to pay more and more for upscale designer versions of their daily jolt. In 2019, gourmet coffee beverages – a broad term encompassing premium varieties as well as espresso-based beverages and blended drinks or cold brew – surpassed 60 per cent of the U.S. market for the first time on record, according to the U.S. National Coffee Association.

Starbucks is the most obvious way for investors to bet on coffee’s money-making potential, but there are others. One of the most intriguing is Luckin Coffee Inc., a chain of coffee shops in China, which debuted on the U.S. stock market on Friday. It soared nearly 50 per cent in early trading.

There are obvious risks here, not the least of which is the fact Luckin, which opened its first store in Beijing less than two years ago, is still losing money. But its first-day pop underlines the shift in market attention, away from beverages that give you a buzz and toward ones that give you a jolt.