US drinks industry ponders effect of cannabis legalisation 

 

As legal use spreads some groups fear a competitive threat, others spy an opportunity

 

Source: FT

by: Scheherazade Daneshkhu in London and Lindsay Whipp in Chicago

November 24th

 

This Thanksgiving, Californians may have been tempted to include an additional ingredient in their pumpkin pies. Marijuana was legalised in the US’s most populous state this month, reflecting a mellowing of social attitudes towards the drug.

 

Alongside the presidential election, five states voted on whether to legalise the recreational use of cannabis, with Maine, Massachusetts and Nevada, voting in favour, along with California.

 

But one sector is watching the spread of legalisation with a degree of trepidation: the $200bn US alcohol industry. Though alcohol and weed might seem eminently compatible to some, a number of brewers fear cannabis as a competitive threat, with some industry groups going as far as contributing funds to anti-legalisation campaigns.

 

Boston Beer Company, the largest craft brewer in the US with brands that include Samuel Adams and Angry Orchard cider, said the widening legalisation of marijuana posed a risk to its sales.

 

“It is possible that legal marijuana usage could adversely impact the demand for the company’s products,” argued its regulatory filing in February. The Massachusetts-based brewer added: “We also believe that impacts the craft beer industry.”

 

In Massachusetts, the Beer Distributors’ PAC, an industry body, donated $25,000 this year to a campaign group fighting legalisation.

 

Trevor Stirling, analyst at Bernstein says it is understandable that Boston Beer – which makes almost all its sales in the US – would list legalisation as a risk factor, whereas the large international brewers, such as Anheuser-Busch InBev, the Budweiser brewer, do not.

 

“Craft beer tends to appeal to a younger and more hipster crowd who are also more likely to be smoking cannabis,” he said. “Whereas a typical Budweiser drinker – a blue collar industrialised worker – is less likely to smoke cannabis, so potentially there’s more risk for craft beer than for mainstream beer.”

 

Other drinks groups are also concerned. Brown-Forman, the Kentucky-based distiller of Jack Daniel’s whiskey, lists “the potential legalisation of marijuana use on a more widespread basis within the United States or elsewhere” as a risk factor in its accounts. The company declined to comment further.

 

Attitudes across the industry are not uniform, however. When the Sacramento-based California Beer and Beverage Distributors group donated $10,000 in 2010 to fighting legalisation in the state, brewer Sierra Nevada, an associate member, publicly objected, saying it had not been consulted and that it was neutral on the issue.

 

“People have the obligation to choose what is right for themselves without influence from outside interests,” it said.

 

If opinions are divided, this is partly because the evidence so far of the threat to alcohol from legalised cannabis is hazy. Only two states – Colorado and Washington – have legalised recreational cannabis for any length of time.

 

The Beer Institute, representing mainly the big brewers, makes clear that it regards marijuana as the new kid on the block, and emphasises the potential risks of its use.

 

“Given the few states where the sale of marijuana for recreational purposes is legal, there is a lack of data to determine any potential impact marijuana may or may not have on other industries,” it said.

 

“What we do know is that beer has been part of American culture for many years. Many questions remain unanswered about marijuana, such as measuring impairment while driving. We urge regulators and lawmakers to address this and other urgent questions as the legalisation of marijuana is considered.”

 

If anything, recent data from Colorado, which became the first state to legalise recreational use in 2012, suggest that sales of marijuana are not necessarily damaging those of alcohol.

 

Blends of marijuana on sale at the Denver Discreet Dispensary in Denver, Colorado, the first state to sell recreational marijuana legally © EPA

 

Tax revenue from sales of beer, wine and spirits increased 4.5 per cent in the first eight months of the year, according to state government data, an acceleration from a 2.7 per cent increase during the same period in 2015 and a 0.1 per cent rise in 2014.

 

The apparently positive effects on alcohol sales in Colorado may, in part, be due to marijuana-driven tourism, say analysts. Bart Watson, chief economist at the Brewers’ Association, representing craft brewers, said beer sales need not necessarily be affected. “It may be that legalisation leads to decreased prices [of marijuana ] and so doesn’t reduce consumer purchasing power for other goods.”

 

In the US, 14 per cent of adults admit to cannabis use – well below the 70 per cent who drink alcohol and 25 per cent who smoke cigarettes, according to a report by Cowen, a research group.

 

But Vivien Azer, analyst at Cowen, points out in a recent report that cannabis has been gaining share among adult men at the expense of alcohol over the past decade. She believes legalisation is likely to accelerate that trend.

 

“We are watchful of substitution with alcohol, as incidence among men in the US has fallen 0.1 percentage points in the last five years, while cannabis incidence has risen by 2.65 percentage points. With the legal market still in its infancy, we think the risk to alcoholic beverage consumption will become increasingly apparent,” she says in the report.

 

However, some drinks group sense an opportunity. Constellation Brands, which sells tequila, vodka and beer brands such as Ballast Point, says marijuana could be used to flavour alcohol.

 

“While we have no plans to introduce a cannabis-related product, we are watching the market closely. It could be a potential opportunity for consumer goods companies; however, there first needs to be clarity regarding legality and regulation,” it said.

 

Stewart Glendinning, head of the international unit at US-Canadian brewer Molson Coors, however, gave little away when he told analysts on a call this month: “Cannabis is something we are thinking very carefully about, not only as a business but also as an industry. There’s just a lot we don’t know at the moment.”

 

The spread of marijuana legalisation has certainly given drinks companies food for thought.

 

Think-tank Volteface, which in a joint report with the Adam Smith Institute urged the British government to legalise cannabis, says, that given a choice, some drinkers might be inclined to cut their alcohol consumption.

 

Henry Fisher, policy director at Volteface, said: “If cannabis is legalised, its price would decrease and people would have a choice of two legal options.”

 

He points to a survey of 1,006 people in London conducted for the think-tank by Populus, showing 45 per cent of cannabis users believe they drink less alcohol as a result of smoking cannabis. That rises to 55 per cent among women.

 

“This indicates that if cannabis consumption were to rise in a population – which it is expected it would do upon regulation – alcohol consumption would decrease,” said Mr Fisher.

 

The spread of legalisation

 

Election night was a mixed blessing for proponents of marijuana legislation. They celebrated California voting for legalisation of recreational use. Yet Donald Trump’s election as president on the same day has raised concerns that the progressive legalisation of marijuana could be derailed – and an end brought to the truce between federal and state law over the drug.

 

The president-elect has nominated staunch conservative Jeff Sessions as the next US attorney-general. Mr Sessions hails from Alabama, one of a minority of states where cannabis use of any kind is prohibited.

 

More than half the inhabitants of the US have access to marijuana for some sort of legal consumption after the vote in California – which has a population of 39m. Eight states have approved the dug for recreational use and it is legally available for medical use in another 28. The market for recreational cannabis in the US could reach $50bn by 2026, nine times today’s $6bn legal market, according to analysts at research group Cowen, in a forecast made two months before Mr Trump’s election.

 

Marijuana is still prohibited at the federal level, limiting access to national banking facilities for companies in the marijuana business. Moreover, the Drug Enforcement Administration classifies marijuana as a Schedule 1 drug, alongside heroin and ecstasy.

 

But somewhat unusually in the US, the federal Controlled Substances Act does not pre-empt state laws governing prohibited drugs, which gives individual states the leeway to legalise cannabis.

 

State and federal laws running parallel with each other create ambiguities, however, whereby the federal prosecutor has the discretion to enforce the law under certain circumstances, though there is, as yet, no example of this.

 

While these legal ambiguities between the federal and state laws could be a source of tension for investors keen to exploit this new industry, interest in the burgeoning sector is still growing fast.

 

“Folks are cautious but right now there is a lot of uninvested private wealth in the country and a lot are finding it too tempting due to the kind of money that has been made so far,” said a lawyer with expertise in the industry.

 

More than half the US population supports cannabis legalisation, rising to 70 per cent among millennials. Even among older people, support is rising – the percentage of Americans over the age of 50 favouring legalisation has roughly doubled since 2000, said Vivien Azer, analyst at Cowen, adding, “voter momentum will likely ultimately spur action at the federal level”.