- Legalizing cannabis is causing a significant reduction in alcohol consumption in both the United States and Canada
- This trend can be expected to accelerate rapidly
- The cannabis industry has unlimited potential to take market share from the alcohol industry
- Cannabis-infused beverages can be expected to outperform
Alcohol use is very popular in our society. Globally, the alcohol industry generates roughly $1 trillion in revenues.
Alcohol consumption is also a big problem. It’s a social problem. It’s a legal problem. It’s a health problem. It’s an economic problem.
Socially, alcohol abuse and alcoholism are highly destructive within families. Alcohol intoxication is also a factor in many forms of crime and violence.
Legally, all the crime that directly or indirectly flows from alcohol (ab)use consumes valuable resources all the way from law enforcement through to our prisons.
In terms of health, excessive alcohol consumption is a direct cause of many serious (and often fatal) medical conditions. Indirectly, alcohol in combination with many different prescription drugs and/or illegal narcotics is a killer.
Economically, all of the issues above exact an enormous annual cost. Tax revenues collected on alcohol sales don’t come close to offsetting the costs to government alone. In particular, this means the huge healthcare bill to treat alcohol-related medical conditions.
Enter legalized cannabis.
Unlike alcohol, cannabis is non-toxic. Unlike alcohol, cannabis is not physically addictive.
Unlike alcohol use, consuming cannabis produces no hangover.
Unlike alcohol use, consuming cannabis produces no motor skill impairment – no slurring of speech, no stumbling around.
Unlike alcohol, cannabis is not contra-indicated with respect to any pharmaceuticals or illegal narcotics. Cannabis + anything doesn’t kill.
For all these reasons, it has been widely expected that legalizing marijuana (cannabis) would have a positive impact in terms of reducing alcohol consumption. TSI regularly reminds investors of the potential of the cannabis industry to take market share from the alcohol industry.
U.S. data already indicates this to be the case. A 2017 article from Mother Jones reports the following:
We find that marijuana and alcohol are strong substitutes. Counties located in MML states reduced monthly alcohol sales by 15 percent, which is a consistent finding across several empirical specifications. When disaggregating by beer and wine we find that legalization of medical marijuana had a negative effect on corresponding sales by as much as 13.8 and 16.2 percent, respectively.
Ouch, if you are a producer or distributor of alcohol products. But for U.S. society as a whole, that’s a major win.
Now new data from Canada contains even more bullish numbers (for cannabis). In a report by Cowen Equity Research, released May 20, 2019, the following data was reported.
- 70% of Canadian consumers who consume both cannabis and alcohol report reducing their alcohol consumption as a result (compared to 64% of U.S. consumers)
- In giving their reasons for using cannabis, 41% of Canadians said this was “as an alternative to alcohol” (behind only sleep (66%), reducing stress/anxiety (62%), “fun with friends” (58%), and improving mood (48%))
Certainly, Big Alcohol has been paying attention. Globally, alcohol sales have been flattening – for all of the reasons above. Big Alcohol is scared.
Cannabis investors are familiar with several significant strategic investments by the alcohol industry in the Canadian cannabis industry, in particular. The largest of these moves (by far) is Constellation Brands’ (NYSE: STZ) US$4 billion investment in cannabis heavyweight, Canopy Growth Corp (NYSE: CGC, TSX: WEED).
More of these investments have already been made in the sector. Much more is to come in the future, as Big Alcohol inevitably responds to this major threat by pulling out its wallet.
So what are the important take-aways here for investors?
1) Legalized cannabis is here to stay. It will continue to steadily (rapidly?) get bigger. It will continue to take market share from the alcohol industry. This will likely be at an exponentially increasing rate as both cannabis legalization spreads and anti-cannabis biases evaporate.
2) Cannabis-infused beverages, while still representing a small overall share of the legal cannabis market can be expected to grow at a rate that will outperform all other cannabis product offerings. The “social beverage” remains an integral part of human social interaction, even more so than food.
3) Investors need to position themselves in cannabis sooner rather than later. While the mainstream media is still pretending otherwise, alcohol’s days as a “growth industry” are over, again for all the reasons above. This means investors need to reap their cannabis profits before these assets are bought up by (among others) Big Alcohol. The declining earnings horizon for alcohol will offset much/most of the upside with respect to cannabis assets acquired by multinational beverage companies.
The news is that cannabis is replacing alcohol to a greater and greater degree in our societies. Investors can profit from this knowledge.