TD Cowen names alcohol producer Constellation Brands (STZ) as the company with the best growth story in US beer as sales of Modelo surged in 2023. TD Cowen Managing Director and Senior Research Analyst Vivien Azer joins Yahoo Finance Live to break down the current state of beer and wine consumption in the US

Azer notes the decline in beer consumption and credits “intentional abstinence” by younger age groups that appear to be shifting to cannabis consumption, an industry that has seen revenue of $26 Billion. Azer sees this trend as a "dislocation" from alcohol to cannabis, which is making a dent in the alcohol market.

Speaking to M&A activity, Azer notes a "reversal" for craft beer acquisitions.

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Video Transcript

DIANE KING HALL: And I want to ask-- I don't know if this comes up in your research. The impact of, say, the GLP-1 discussion, and there's been talk about it impacting people's appetite for beverage. Is that a headwind that is facing any of these beer makers?

VIVIEN AZER: Potentially, if we assume that the early adopters of GLP-1s are higher income consumers. Higher income consumers tend to over-index to wine. Where we have been very vocal around restraint with alcohol consumption as a combination of intentional abstinence, which we find to be outsized with younger consumers taking a week or month-long breaks, something like a Sober October or Dry January, as well as the interaction with cannabis.

The cannabis market is now $26 billion in revenues as of 2022. So that's over 10% of the alcohol market, and it's big enough now where we believe we're seeing dislocation away from alcohol sales into the legal cannabis market. And it's a way for consumers to take a break from alcohol by substituting it with cannabis.

We see a particular trend with 18 to 25-year-olds. There's been over a decade long divergence where past month alcohol consumption with 18 to 25-year-olds has been on the decline. But reported past month cannabis incidents has been on the rise.

BRAD SMITH: For a lot of these companies too. I mean, it's been a story of acquiring to grow. Are there any major M&A activities that we're anticipating to come about next year as you think about the brands that have done well as stand-alone that some of the larger ones out there, the Constellations, that have a history of making some of these very strategic acquisitions might be eyeing in order to grow out their portfolio?

VIVIEN AZER: 2022 is really interesting. And really over the course of-- since the pandemic, we've actually seen a reversal in M&A activity for beer specifically, where you had seen a lot of acquisitions of craft beer brands. So you'll recall Constellation Brands had acquired ballast point. There were a number of craft beer acquisitions from ABI and Molson Coors as well.

And we've actually seen an unwind of those assets. ABI, for instance, sold nine brands to Tilray, which is a Canadian-based cannabis company. But they also own Sweetwater in Atlanta and Montauk, which is a craft beer offering in New York. So you actually have seen portfolio cleanup from the major operators, where we have seen more bolt on M&A is in the distilled spirits.