- Business Insider reported last year that Canada has been seeing consistently decreasing domestic beer sales, and 2019 showed the worst domestic beer decline in at least 6 years, according to a recent report by Cowen.
- This trend has led some alcohol brands — like Molson Coors — to cite cannabis as a “risk factor” in financial reports and enter joint-ventures with cannabis companies and others, like Constellation Brands, to invest heavily in the cannabis industry in recent years.
- But a tough 2019 for the cannabis industry, coupled with continuously dropping domestic beer sales, seems to have prompted the alcohol industry to tread cautiously, favoring “less capital-intensive joint ventures” over high-risk investments, according to a partner from Canadian law firm Bennett Jones.
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Declining beer sales in recent years have prompted some beer giants to look at cannabis as both a threat to their market share, as well as a possible new area for investment.
But for those who took the investment plunge, a turbulent 2019 for the cannabis sector — coupled with faster declines in domestic beer sales in Canada — has prompted alcohol giants to tread carefully moving forward, analysts and experts told Business Insider.
In the first full year of adult-use cannabis in Canada, domestic beer sales plunged 3% in volume compared to an average decline of 0.3% between 2014 and 2018 (where the steepest decline happened in 2017 with a 1.2% decrease), according to a recent report by Cowen (Cowen’s report covers YTD through November 2019).
Though it is difficult to prove correlation between cannabis legalization and declining beer sales, Liz Connors — director of analytics at Headset — told Business Insider that it’s fair to hypothesize that at least some of the C$128 million that consumers spent on cannabis in Canada in the month of October last year — which annualizes to C$1.5 billion per year — may come from consumers deciding to use some of their disposable income on cannabis instead of alcohol.
But despite the hugely publicized deals between the alcohol and cannabis sectors in recent years, Headset reported in an August 2019 report that beverages make up a minute portion of the overall cannabis market in the US, only 1.42% of sales at their peak market share in July 2018.
Cannabis’ threat to the alcohol market
Jessica Lukas — senior vice president of commercial development at BDS Analytics — acknowledged to Business Insider that there may be interaction between the ebbs and flows of cannabis and alcohol sales. But she also noted that, that even in places like Canada and Colorado — where there is a full assortment of cannabis products (vapes, edibles, and topicals) — the data is not strong enough to prove there is a direct correlation.
What there are, however, are two main risks to the alcohol market as cannabis legalization expands.
One of them, Lukas said, is pairing— where in a given situation, the consumption of cannabis may lead to a reduced consumption of alcohol.
“There are occasions where people are pairing alcohol and cannabis and [in those instances] people tend to drink less,” Lukas said. “You’re not losing an occasion [for consuming alcohol] but the units [of alcohol being consumed].”
The second risk is occasion. Those who might regularly consume both cannabis and alcohol may choose to substitute alcohol with cannabis in some instances where they would have consumed alcohol instead. In these cases, alcohol companies would lose an occasion for their product to be purchased and consumed.
But rather than seeing cannabis as an overwhelming threat to the alcohol industry, Lukas said we should rather see it as a “fourth competitor,” as evolving markets and trends have always moved market shares among the alcohol sector’s beers, spirits, and wines categories.
“It’s not that the alcohol industry is going away,” she said. “You just have another player here that’s going to steal some share.”
This risk of losing market share has led some alcohol brands to dip their feet in the cannabis sector with some companies — like Constellation Brands — diving in head first. They’ve invested millions into Canadian cannabis giant Canopy Growth as early as 2017 followed by billions in 2018.
Constellation Brands recently reported in their latest quarterly earnings a $484 million loss on their investment in Canopy Growth. Earlier this month, Canopy Growth announced that the rollout of their cannabis-infused beverages, which were expected to come on shelves in January, would be delayed. The company stated in its press release that it does not expect the delay to impact its revenue goals.
On a call with investors following quarterly earnings, Constellation CEO Bill Newlands still expressed optimism about Canopy Growth’s future, saying that consumers are moving from the illicit to the legal market.
Others, like Molson Coors, have cited the cannabis industry as a “risk factor” in financial reports. Molson Coors opted in 2018 to enter a less capital-intensive joint venture with HEXO Corp — a Canadian cannabis producer — agreeing to create a non-alcoholic cannabis-infused beverage for the Canadian market.
Cannabis is learning lessons from tobacco and alcohol
There are also less obvious ways that the two sectors are interacting. Aaron Sonshine, partner at Canadian law firm Bennett Jones, told Business Insider that with the rollout of 2.0 cannabis products (vapes, edibles, topicals) in the Canadian market, he has seen many cannabis companies “hiring very aggressively” from the alcohol and tobacco industries.
Sonshine said this is because senior management from those sectors have experience navigating a highly regulated market where expertise on consumer package goods and supply chain management are paramount.
“We’re not seeing many additional examples of direct investment from the liquor space as you might have expected after Constellations’ investments into Canopy,” he said, but Canada is seeing its cannabis companies learn from other more mature industries, like tobacco and liquor, as it develops.
One example, Sonshine said, is that the cannabis industry seems to be emulating the liquor sector’s tendency to prefer specializing in a particular vertical rather than attempting to rule an entire supply chain. Another example is cannabis companies learning how to navigate narrow marketing parameters, like the one the tobacco industry has had to deal with in marketing its own products.
Moving forward in 2020, Sonshine predicted that we won’t see liquor companies making huge sweeping investments in cannabis like Constellation did with Canopy Growth. Rather, what we might see are fewer capital-intensive joint ventures that would require lower-cost entry points, like the one between Molson Coors and HEXOS, as well as a continuation of hiring individual c-suite executives from the liquor and tobacco spaces.
“There is so much competition in the Canadian cannabis sector and there are some clear headwinds including access to capital and other issues,” said Sonshine. “I expect a lot of the big US or international companies are going to take some time to see the 2020 and 2021 earnings to see which of the Canadian companies are really winning market share.”
Both Sonshine and Lukas said that until there is an indication from Washington of potential federal legalization in the US, they don’t see alcohol companies jumping into the cannabis sector as very likely.
Lukas said she wouldn’t be surprised if we soon saw more joint ventures or licensing agreements between alcohol and cannabis as well as bigger moves within the CBD market. But she pointed out that we don’t yet have a complete picture of what the opportunity for cannabis beverages could potentially look like.
In the US, cannabis beverages account for a small portion of sales in the few places they are legally allowed and even in Canada, these beverages just started coming on the shelves when 2.0 products were made available in late 2019.
“It’ll be interesting to see what will happen with big alcohol companies standing behind them,” Lukas said.
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