Constellation (Beer) Brands Is High On Marijuana Company Investment
A recent article that we highlighted on this website discussed the loss of alcoholic beverage market share by beer to wine and spirits. The leaders of some of America’s and Europe’s mega-beer corporations have been calling the recent gains of spirits and wine to the attention of the beer and craft beer communities, and are formulating strategies in an effort to take this market share back.
Other articles (here, here, and here) have pointed out that the younger generations, those millennials who have just turned 21 to those about 25, are especially light drinkers. True, they have shifted more to wine and hard liquor, but they are also drinking less alcohol in total. They drink less than any group of Americans since their grandparents’ age, and have the low DWI levels to reflect it according to a recent Vine Pair article by Tara Nurin. They tend to be more health conscious, and believe (due to good marketing by wine and spirits) that beer is more fattening. This corresponds to an increase in low calorie beer sales – Michelob Ultra is experiencing a huge resurgence.
Against this background, there may actually be a more formidable challenger to the beer industry, especially amongst the group that would be expected to keep growing the craft beer trend (new drinkers). The threat comes from marijuana. While cannabis is the closest botanical relative to the hops used in beer, it doesn’t seem to be this link that is driving a shift from alcohol to marijuana.
A recent study conducted by Cowen and Company (summarized here and here), showed that in both Canada and the U.S. there has begun to be a substitution of marijuana for alcohol use. Other recent studies have seen the same thing in previous waves, whenever marijuana consumption increases, there is a concomitant decrease in alcohol consumption. Cowen’s numbers indicate that 64% of Americans and 72% of Canadians that use marijuana have reduced their alcohol consumption. In recent years this has been even more marked in the younger adult age groups.
Debra Borchardt reported in Forbes Magazine earlier this year that that the Cannabiz Consumer Group (C2G) predicted that many beer drinkers (including craft beer) would switch to marijuana, and that the switch would be permanent. Because of this, they also predicted that marijuana might take more than $2 billion from beer’s market share, stating that a whopping 27% percent of dedicated beer drinkers that stated that they have or would switch from beer to pot if it were legalized in their area. In California, Monocle Research, working with a cannabis company called OutCo, found that 51% of the surveyed population planned for cannabis to replace their alcohol use, with 33% saying they would give up beer.
These numbers are even more stunning when you realize that only eight states (AK, CA, CO, ME, MA, NV, OR, WA) as well as the District of Columbia have legalized recreational marijuana. However, in one state with recreational marijuana use, Colorado, alcohol sales tax revenues paid to the state actually increased in 2016, after legalization. Bart Watson of the Brewers Association, as described in the Forbes piece, says it is too early for marijuana proponents and economists to celebrate. He sees little evidence of a substitution of pot for alcohol yet. He said, “Many of the articles that want to find a relationship have pointed out that Washington beer sales per capita are down since legalization … conveniently ignoring that Colorado shows the opposite trend.”
Despite this declaration that beer may be able to survive marijuana legalization, there is movement in the market that suggests that some companies are looking to cash in. Perhaps as an effort leverage the pot movement against their beer holdings, Constellation Brands (owners of Corona, Ballast Point, Funky Buddha, and Svedka, amongst other brands of wine, beer and spirits), has now entered into an agreement to purchase a 9.9% stake ($191 million investment) in Canada’s Canopy Growth Corporation. According to an article in Brewbound by Chris Furnari, and as first reported in the Wall Street Journal, this would make Constellation the first major alcoholic beverage manufacturer (and a Fortune 500 company to boot) to formally expand into the marijuana business.
By partnering with Canopy, the world’s largest publicly traded company dealing in cannabis, Constellation is positioned to dive into the marketplace quickly, although they have stated that they will not begin to sell cannabis products until it is available nationwide. In Canada, this could be as early as next July.
Canopy Growth Corp. is gearing up to develop and market cannabis-infused beverages (alcohol-free), but they are not the only company entering this market. Several THC-containing beverages are already on the market in states where recreational use is legal. California companies are selling sodas with 50 mg THC while other companies in Washington state are producing drinks with less THC. A Seattle-based company makes a powdered cannabis preparation that can be blended with other foods, and other entrant is a tablet that can be dropped into any drink.
Some analysts believe that the cannabis market could reach $50 billion in the U.S. alone, so Constellation Brands is using the purchase to position themselves to take advantage of this potential. The transaction is expected to be finalized late in 2018, with an option to purchase more of Canopy at a later date. Investors in both companies reacted positively to the move, with shares in each company rising. Stock prices immediately rose for Canopy Group by 15%, whose stock symbol just happens to be WEED.
Constellation Brands CEO Rob Sands acknowledged that cannabis could be a threat to alcohol sales in the future, but did not directly state that this was a reason for the acquisition. However, he did tell the Wall Street Journal, “We’re not going to stand around twiddling our thumbs.”