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Legal Bud Weighing on Beer’s Buzz?

Legal Bud Weighing on Beer’s Buzz?

 

Source: Cowen and Company

November 29th

 

The Cowen Insight

In adult use cannabis markets, there are clear signs that cannabis is weighing on beer category trends, with CO, WA and OR underperforming the overall beer market by ~260 bps, YTD. Mainstream beers are the biggest drag, while craft is also slowing. Imports look the most immune.

 

Legal Cannabis Weighing on Beer

Herein, we examine Nielsen data on beer category trends in Colorado (Denver metro), Washington and Oregon. While these markets have collectively underperformed the overall U.S. beer market over the last ~2 years, the magnitude of the underperformance has increased notably. YTD, combined beer volumes in these markets have fallen over 2%, lagging the overall U.S. beer market by ~260 bps. This is perhaps not surprising, given that U.S. government data for the states of CO, WA and OR all show consistent growth in cannabis incidence among 18-25 year olds, coupled with declines in alcohol incidence (in terms of past month use, see Figures 3-5).

 

Mainstream Beer Under Siege, Craft Decelerating, Imports Impervious

Across the three legal cannabis markets that we examined, pressure on beer volumes looks to be primarily driven by underperformance from below premium (economy) and premium domestic beers (e.g., Bud Light, Coors Light). YTD, volumes for economy beers in these adult cannabis use markets are down 2.4%, while premium domestic beers are down 4.4%. Consistent with the trends that we are seeing nationally, craft beer is also slowing in these markets, as volumes are flat YTD. While growth is still evident in WA and OR, CO is in decline. The standout from a segment perspective is the imported beer category, though it is interesting to note that imported beer volumes in these geographies have lagged meaningfully the growth seen on a national basis.

 

Stock-Specific Implications

Mainstream Beer. With economy and domestic premium beers under pressure from cannabis, we would expect to see continued volume pressure for the Big 2 (ABI, not covered, and TAP, Outperform). While TAP is highly exposed to these two segments (~90% of volumes), we are encouraged that the company has ample cost savings as an offset.

 

Craft Beer. While craft beer volumes are flat YTD in these key cannabis markets, there has been a clear deceleration in trends, consistent with what we are seeing nationally. This reinforces our cautious view on SAM (Underperform). Meanwhile, for Outperform rated BREW, pressure in craft beer has been long-apparent, but the company thankfully has the robust growth of Kona as an offset (and as a potential catalyst, given the qualified offer agreement with ABI).

 

Imported Beer. STZ remains our Top Pick in alcoholic beverages, as the company’s portfolio under-indexes to cannabis use (given lower levels of cannabis consumption among Hispanics and women, benefiting both the beer and wine pieces of the company’s portfolio).