Legal marijuana could crash alcohol giants’ party: analyst
Companies could see sales dip as many consumers expected to switch to drug
Major alcohol companies will likely see sales squeezed by legal cannabis in the coming years, according to Wall Street research firm CFRA Research.
“Due to shared usage occasions, we view the legalization of cannabis as a threat to alcohol industry consumption growth,” wrote CFRA analyst Joe Agnese, who covers the food and beverage and tobacco industries, in a note published Monday.
Agnese cites Anheuser-Busch InBev SA/NV, The Boston Beer Company and Brown-Forman Corp., best known for Jack Daniels Tennessee Whiskey, as companies that could see a decline in product consumption.
“When I consider the use indications of the alcohol industry — when it’s consumed, who consumes it, that type of environment — alcohol overlaps significantly with cannabis, whereas something like tobacco doesn’t,” said Agnese, in an interview.
“While you are going to see a big shift from the illegal (cannabis) market to the legal market, you’re also going to have a lot of alcohol consumers who don’t consider cannabis, because it’s illegal, moving over to consuming cannabis, especially with the development of closer alternatives such as infused beverages.”
The question of whether legal marijuana takes of a bite out of alcohol sales has been hotly debated in recent years, with some research suggesting the two products are substitutes and other research suggesting cannabis and alcohol sales are complementary.
Agnese, for his part, points toward 2017 research from the University of Connecticut and Georgia State University that found, based on the analysis of sales data collected by Nielsen retail scanners between 2006 and 2015, that monthly alcohol sales fell an average of 13 per cent in states that had legalized medical marijuana.
“Canada’s going to be just a wonderful test market for the U.S. to see how it all plays out,” said Agnese, referring to the upcoming federal legalization of recreational marijuana use in Canada.
A number of large alcohol companies are already watching cannabis closely.
“Although the ultimate impact is currently unknown, the emergence of legal cannabis in certain U.S. states and Canada may result in a shift of discretionary income away from our products or a change in consumer preferences away from beer,” wrote The Molson Coors Brewing Company in its most recent filing with the U.S. Securities and Exchange Commission. Both Boston Beer and BrownForman have likewise said they ’re monitoring cannabis competition.
“The question is … once there’s clarity around it becoming legalized, how significantly does the alcohol industry get involved with the cannabis industry? Do they participate through M and A or develop their own infused beverages?” said Agnese.
In the fall, Constellation Brands Inc., which owns brands like Corona, took the plunge, investing $245-million in Canopy Growth Corp. The two companies are now working together to develop cannabis infused beverages, that could be legal in Canada as early as 2019.
“Constellation had a Canadian wine business that they sold recently, and they’re more North American and local-market focused (than companies like Anheuser-Busch). They’re smaller, I think more mobile, and probably better positioned and able to identify early trends,” said Agnese.
For the big alcohol players waiting for a change in U.S. federal law before investing in cannabis products, the shift could come sooner rather than later, he said.
Counter-intuitive as it sounds, U.S. Attorney General Jeff Sessions’s decision to repeal the previous administration’s Cole Memorandum — which had reduced federal enforcement of cannabis offences — could prove a catalyst for change, said Agnese.
“The revocation increases the possibility that one of the 93 U.S. attorneys will act against an entity in a state that has legalized cannabis. Due to strong bipartisan voter support for cannabis legalization ... we believe any action taken greatly increases the chances that Congress will act to ease cannabis regulations,” Agnese wrote in his note.