Any relaxation of rules around the prescription, use and sale of cannabis in any market will catch the attention of the beverage-alcohol industry, with brewers, distillers and winemakers monitoring the potential of any increase in availability of an alternative ‘buzz’.
However, the plans set out last week by President Biden to reclassify marijuana under US federal law should not unduly concern the alcohol sector, industry watchers have suggested.
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President Biden, a long-time advocate for the reclassification of marijuana at a federal level, has published a proposal to categorise the drug as a “schedule three” substance, down from “schedule one”.
Marijuana was classified as schedule one under the Nixon administration in 1970. Under US law, the possession, the trafficking or sale of a schedule-one drug can lead to up to 15 years in prison.
A schedule-three classification does not represent a wholesale easing of restrictions on marijuana. Regulations vary by state but a schedule-three drug offence can, ultimately, still land a prison term of up to five years.
However, the direction of travel in US policy over marijuana has long been clear, at least at state level. US states are already allowed to pass their own rules on cannabis. The drug is legal for medical use in 38 US states and recreationally legal in 24. According to AllianceBernstein, legal cannabis generated $30bn in net sales in the US in 2022, a level the investment bank says is equivalent to around 13% of the US alcohol retail market (and, more specifically, 26% of beer sales, circa 45% of spirits and approximately 54% of wine sales).
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By GlobalDataBiden’s plans to reclassify marijuana at a federal level require a 60-day public rulemaking process in which the US government will gather information and public comment.
Marijuana reclassification unlikely to lead to jump in use
Kris Inton, a Chicago-based equity strategist covering the cannabis sector at US financial-services group Morningstar, says the federal reclassification will not lead to a step change in the recreational use of the drug.
“Schedule three is still a prohibited drug. It just says there are potential medical uses,” Inton explains. “It’s a difference because it opens the door for medical use and opens the door for more research, because as a Schedule 1 drug, it’s very hard to even do research for scientific purposes – but it doesn’t do anything from a recreational or adult use perspective.”
Trevor Stirling, an equity analyst covering the beverages sector at AllianceBernstein, concurs.
“In those states that don’t have medical cannabis, it would make it easier for companies to operate. However, states have already legalised medical cannabis, so in terms of incremental consumption, I don’t think there’s much that’s going to come out of this,” Stirling says.
“It doesn’t really change the attitude to recreational cannabis use at all at a federal level but it does make it a slightly less heavily regulated drug.”
Cannabis sector applauds decision
The US National Cannabis Industry Association (NCIA) welcomed the proposal to reclassify marijuana but noted it is just a “first step” towards a “rational marijuana policy”.
“Rescheduling alone does not fix our nation’s state and federal cannabis policy conflict. Only Congress can enact the legislation needed to fully respect the states and advance the will of the vast majority of voters who support legal cannabis,” NCIA CEO Aaron Smith said.
In the wake of Biden’s announcement, Canada-based brewer and cannabis business Tilray Brands said it would move to raise funds to fuel expansion in the US ahead of the planned easing of restrictions.
Nasdaq-listed Tilray said it plans to use the capital to fund “strategic and accretive” acquisitions, including the “potential” purchase of US and international assets. The group plans to “capitalise” on “expected regulatory advancements” in the US.
Inton says Canada-based cannabis companies haven’t been able to sell in the US due to current federal rules, leaving rivals south of the border to gain an edge.
Tilray’s announcement, Inton says, “is kind of an indication that they’re behind”. He adds: “They have never operated in the US because they didn’t want to violate federal law. It would mean they wouldn’t be able to list in the US anymore. Now that this is like looking like easing, they’re like ‘Okay, maybe I can start operating in the US.’ The problem is a lot of these American companies have gotten fairly large and so targets that they could probably get are going to be smaller.”
Alcohol companies unlikely to review cannabis strategy
In the late 2010s, there was excitement about the potential for cannabis products, including beverages, to eat into the market share of beverage alcohol. One story goes that a cannabis company CEO addressed an investment conference in the US with how they could easily see a time when drinkers at, say, a barbecue would opt for a cannabis drink over a beer. The conference’s attendees seemingly lapped it up.
However, the sales of cannabis beverages remain a small part of the wider cannabis market. “The beverages haven’t really taken off. Cannabis consumption continues to mostly be flower,” Inton says. “The reason it always tends to show up in chocolates, candies, brownies and things like that is you need the sugar to cover up the taste.
“Two, it really hasn’t been turned into this more social thing where it is consumed more openly instead of alcohol or at a social event.”
Alcohol companies’ forays into the cannabis sector have proven somewhat problematic.
Last year, Molson Coors Beverage Co. sold up out of its Truss Beverage Co. cannabis drinks venture, offloading the shares to Tilray.
2023 also saw distribution behemoth Southern Glazer’s Wine and Spirits end its US distribution deal with Canada-based CENTR Brands Corp. for its CBD beverage products.
Perhaps most striking was Constellation Brands’ investment in Canada-based cannabis business Canopy Growth. Constellation first invested in Canopy in 2017 and, at one stage, owned 38.6% of the company. However, in 2022, the Modelo Especial brewer moved to reduce its exposure to marijuana and converted its common stock holding in Canopy into exchangeable shares in the business.
“That turned out to be a black eye for the company. They kept losing money and had to write off the investment,” Morningstar beverages analyst Dan Su says. “They’ve since articulated many times they are not interested in investing in non-beer and spirits assets going forward. I think that’s probably just a reflection of the thinking among alcoholic-beverage executives about the cannabis opportunities – still very cautious and not really committed to investing a big amount of money.”
Cannabis “not an existential threat” to alcohol
Biden’s decision to look to reclassify marijuana may be seen as just a small step forward for the cannabis market but investors in beverage-alcohol companies will be thinking about the longer-term impact the wider availability of the drug might have on the sector. Might a rise in demand for cannabis hit alcohol sales?
AllianceBernstein says there have been signs north of the border in Canada, where cannabis is federally legal, of an impact on alcohol sales. However, Stirling suggests beverage-alcohol companies shouldn’t be too worried.
“In a word, we see some threat to beer,” he says, noting how beer sales have been trimmed by around 0.7 percentage points in US states where recreational use is legalised.
“We don’t see any significant impact on spirits. Arguably wine is one of the categories that may be hit harder than certainly spirits and probably as bad as beer.”
Nick McCoy, co-founder of US M&A advisory firm Whipstitch Capital, says he expects demand for cannabis beverages will rise after reclassification alongside demand for marijuana more broadly.
He sets out two ways there could be “material growth” for cannabis-based drinks. One factor McCoy suggests is the increase in the distribution of THC beverages in the on-premise.
“When this happens, I feel strongly that volumes will increase considerably particularly at events and places where people are attending functions for longer time durations. The price points of the beverages will be more in line with alcohol alternatives and will appear less expensive. It could also become a ‘go to’ for someone looking to drink something without alcohol beyond mocktails or water,” McCoy explains.
He suggests brand owners could look to develop cannabis drinks “with broader functionality”.
“I also think the market will grow from new product offerings that contain THC and other supplements with a stated intentional purpose; calm, energy, etc,” McCoy explains.
“You can look at the success of brands like [cannabis brand] 1906 as an analogue in the dispensary channel today. On a dollar-per-milligram basis that brand typically sells for a material premium.”
According to McCoy, THC beverages could contribute to interest in low-and-no alternatives to alcohol should the drinks make further inroads in the on-trade. “I do see the potential for some acceleration of the non-alcohol trend if THC beverages are available on-premise,” he says. “I see less impact at-home. Some but less, especially when home users may have edibles handy.”
Broadly, the consensus seems to be that cannabis does not represent a major competitive risk to beverage-alcohol companies.
“In general, it seems to coexist alongside alcohol. People use the drugs in different occasions. There probably is a bit of competition for share of wallet and, on some occasions, I call it the ‘wind down’ occasion, they’re direct competitors. It’s certainly not an existential threat to alcohol, let’s put it that way,” AllianceBernstein’s Stirling says. “At the margins, yes, but it’s not an existential threat.”
