Heed Heineken’s Warning: Cannabis Is A Threat
Source: Cowen
October 16th
The Cowen Insight
Last week, Heineken noted that beer is plagued by competition from wine and spirits, while the industry should also be mindful of expanding cannabis access. We concur, as the next 12 months will bring rapid change. A state-by-state analysis shows that alcohol and cannabis have significant overlap, in particular in highly populated urban areas. Expansion into CA and MA could be disruptive.
Key Highlights
Last week, Heineken USA’s Ronald den Elzen called out cannabis in addressing beer’s challenges at the 80th annual NBWA (National Beer Wholesalers Association) conference in Vegas, according to Beer Business Daily. This is one of the higher-profile call-outs that we’ve seen for cannabis from the alcohol industry: “Wine and spirits are not sitting still and marijuana is being legalized in many states. We have to act now, and we have to do it together.”
We’ve long acknowledged that cross-category pricing and brand lifecycles are structural headwinds for the beer industry. However, the comment around the expansion of cannabis access caught our interest. From a medical standpoint, while restrictions vary, over 60% of the country has some kind of access to cannabis. More importantly, the expansion of adult-use cannabis increasingly overlaps with states with above-average alcohol incidence. (Notably, the tobacco industry doesn’t seem to have anything to worry about, as legal cannabis states tend to have lower levels of tobacco incidence.)
And the industry is right to start paying closer attention, as the next 12 months will bring rapid change in the national cannabis landscape. With the expansion of cannabis to more affluent, urban states like California and Massachusetts, bigger profit pools are at risk for the alcohol industry, in particular with the expansion into more large urban areas, which have higher alcohol and cannabis incidence rates relative to more rural areas (where the opposite holds true for tobacco).
Given the higher levels of both alcohol and cannabis incidence in these geographies, one could certainly argue that access to legal cannabis will have little effect on alcohol consumption (as illicit cannabis consumption has already been underway). However, we have consistently seen in our consumer survey work that alcohol and cannabis substitution is common.
This should be particularly troubling for the alcohol industry as consumer behavior with cannabis seems to evolve over time. Looking at the three legacy states we can note:
- Overall consumer adoption / admission has been climbing fairly consistently; and
- Conversion within the category is expanding by age cohort.
Specifically, 10 years ago, cannabis consumption among 18-25 year olds in CO, WA and OR was ~2.5x higher than the state’s total incidence. The most recent data, however, shows that youth incidence is only ~2x that of the overall state. And, given that underlying 18-25 year old incidence has not collapsed, it points to greater degrees of consumer engagement among older cohorts.
The growing level of cannabis engagement across age cohorts matches the national trends, where we see already high levels of cannabis incidence among younger adult cohorts, but significant growth among older consumers. The waterfall effect of this trends, coupled with increased legal access, should indeed be capturing the alcohol industry’s attention.