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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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 many companies, their growth story often revolves around strategic acquisitions. As such, are there any significant M&A activities we should be anticipating for next year? I’m particularly interested in brands that have done well independently and might be targeted by larger entities like Constellation, which has a history of making strategic acquisitions, to expand their portfolio.

VIVIEN AZER: 2022 is definitely going to be intriguing. Throughout the pandemic, there has been a trend reversal in M&A activity for beer specifically. Previously, we saw many acquisitions of craft beer brands, including Constellation Brands’ acquisition of Ballast Point, along with several others made by ABI and Molson Coors.

Recently, however, we’ve witnessed a de-acquisition of these assets. ABI, for example, offloaded nine brands to Tilray, a Canadian cannabis company that also owns Sweetwater in Atlanta and Montauk, a craft beer offered in New York. Major operators seem to be cleaning up their portfolios, while there has been an increase in bolt-on M&A activities within distilled spirits.