This was an enjoyable read, Leandro. Plenty of parallels to the tobacco industry, as well as pockets of deep contrast.
"Tobacco-related stocks, however, did quite well against this backdrop. I am no expert here, but this has probably something to do with (1) consolidation, (2) smokeless products, and (3) lower starting valuations as the market feared the industry was forever doomed."
This is simplified but correct. Legislation and regulations aimed to reduce usage over the last 70 years have been based on perceived health harms to the individual and society. However, restrictions on marketing and advertising made it ever more difficult for new brands to enter the market. Over time, consolidation naturally occurred. Reduced marketing and advertising spending provided excess capital to reinvest, either internationally or into diversification efforts (almost all of which were terrible.) Perhaps most importantly, widespread pessimism has been a massive driver of profitability. Both outsiders and the industry itself had long underestimated the long-term demand for tobacco. A consolidated industry was able to exercise tremendous pricing power over time. And, as you said, low multiples led to staggering returns. That was also amplified by capital used to repurchase shares, which were often priced as if the industry was going to rapidly disappear entirely.
Plenty more to say on smokeless, other categories, and now next-gen products, which I write on a fair bit. But a great resource to learn more about the widespread pessimism that has seemingly always existed against the industry is an interview we conducted with Rae Maile, a veteran analyst who has covered the industry for more than 35 years:
I'd be hesitant to take much from the animal studies. The vast majority of people do not drink because they have cravings - they do so because they enjoy it, or because it reduces their social anxiety. To me, increasing awareness of alcohol's effects on health is a much bigger issue than GLP-1s.
Great article. Few observations, the Pareto principle applies (for better or for worse) to alcohol consumption -20% of consumers of alcohol do so at hazardous levels and are responsible for majority of sales. The same people are unlikely to be able to afford GLP1 drugs over the long term.
There does seem to be a trend amongst younger people to reduce drinking, if they can afford to go out to drink, it seems to be focused on 1 cocktail sipped over the evening rather than round after round of beers. The rise popularity of no/low alcohol options and mocktails is interesting and allows the socialisation to continue. Companies still sell these at similar prices to alcohol containing equivalents - much better for their profit margins!
I would suggest a similar dive into coffee and caffeine.
Personally I have switched to decaf for a long time now.
If you take the typical coffee nerds out there, they don't drink coffee for the caffeine itself, but for everything around it. The taste, the process and the ritual.
Caffeine can have negative side-effects long-term ( as I had ) and not anything purely positive in most cases. It's more of a placebo effect that it "wakes you up".
So I can see decaf rising once this catches up as a trend.
Great read! I’m on the younger side (finishing up university) and in my personal experience alcohol is still quite big just not as big as it used to be. With that being said humans have consumed alcohol for thousands of years and I don’t think that will change.
This was an enjoyable read, Leandro. Plenty of parallels to the tobacco industry, as well as pockets of deep contrast.
"Tobacco-related stocks, however, did quite well against this backdrop. I am no expert here, but this has probably something to do with (1) consolidation, (2) smokeless products, and (3) lower starting valuations as the market feared the industry was forever doomed."
This is simplified but correct. Legislation and regulations aimed to reduce usage over the last 70 years have been based on perceived health harms to the individual and society. However, restrictions on marketing and advertising made it ever more difficult for new brands to enter the market. Over time, consolidation naturally occurred. Reduced marketing and advertising spending provided excess capital to reinvest, either internationally or into diversification efforts (almost all of which were terrible.) Perhaps most importantly, widespread pessimism has been a massive driver of profitability. Both outsiders and the industry itself had long underestimated the long-term demand for tobacco. A consolidated industry was able to exercise tremendous pricing power over time. And, as you said, low multiples led to staggering returns. That was also amplified by capital used to repurchase shares, which were often priced as if the industry was going to rapidly disappear entirely.
Plenty more to say on smokeless, other categories, and now next-gen products, which I write on a fair bit. But a great resource to learn more about the widespread pessimism that has seemingly always existed against the industry is an interview we conducted with Rae Maile, a veteran analyst who has covered the industry for more than 35 years:
https://www.preferredsharespodcast.com/p/rae-maile-a-lifetime-in-tobacco
This was an outstanding reply, I know you are the man to discuss the tobacco industry. Will add this episode to my list.
Thanks a lot Devin!
I'd be hesitant to take much from the animal studies. The vast majority of people do not drink because they have cravings - they do so because they enjoy it, or because it reduces their social anxiety. To me, increasing awareness of alcohol's effects on health is a much bigger issue than GLP-1s.
Agreed on both counts, but I think awareness on health is somewhat mitigated by taking all celebrity-driven supply out of the market (or most of it)
Great article. Few observations, the Pareto principle applies (for better or for worse) to alcohol consumption -20% of consumers of alcohol do so at hazardous levels and are responsible for majority of sales. The same people are unlikely to be able to afford GLP1 drugs over the long term.
There does seem to be a trend amongst younger people to reduce drinking, if they can afford to go out to drink, it seems to be focused on 1 cocktail sipped over the evening rather than round after round of beers. The rise popularity of no/low alcohol options and mocktails is interesting and allows the socialisation to continue. Companies still sell these at similar prices to alcohol containing equivalents - much better for their profit margins!
Agreed on pretty much everything you said here!
Very well written piece. Entertaining read. Thank you.
Thanks for reading and glad you liked it!
I would suggest a similar dive into coffee and caffeine.
Personally I have switched to decaf for a long time now.
If you take the typical coffee nerds out there, they don't drink coffee for the caffeine itself, but for everything around it. The taste, the process and the ritual.
Caffeine can have negative side-effects long-term ( as I had ) and not anything purely positive in most cases. It's more of a placebo effect that it "wakes you up".
So I can see decaf rising once this catches up as a trend.
Mr Hoffman himself verifies this I believe. https://www.youtube.com/watch?v=yYTSdlOdkn0
// opens a tab with "decaf companies stocks"
Thank you very much for this, will take a look!
Looking forward to it.
Will have lots of context to think about, next time I open a double IPA.
Great read! I’m on the younger side (finishing up university) and in my personal experience alcohol is still quite big just not as big as it used to be. With that being said humans have consumed alcohol for thousands of years and I don’t think that will change.
A missing factor: one symptom of Long Covid is a drop in tolerance for alcohol (and caffeine). Long Covid is rampant.
How rampant? My parents had long COVID and they are drinking as much as ever, I’d say
Not everybody has every symptom.