It appears that marijuana stands as the biggest threat to the beer industry and the younger generation is to blame. According to a variety of news sources including Forbes and CNBC, legal marijuana will kill the beer industry and one of the arguments being put forward to support this is that beer sales have been decreasing while marijuana sales have been on a steady increase.
To better illustrate this point, a recently released research report from Cowen & Co. found that during the three most recent cycles of alcohol consumption there was a notable inverse correlation with cannabis use. The analyst noted that during the 1980s and 1990s alcohol consumption declined by 22 percent while marijuana use increased by 18 percent.
And it’s not only Cowen that sees a substantial weakness in the beer industry. In July Goldman Sachs downgraded shares of Boston Beer Company (NYSE: SAM) and Constellation Brands (NYSE: STZ) due to “sluggish beer sales and shifts in demographic tastes.” Consequently, shares of Boston Beer tumbled 5 percent while those of Constellation Brands fell about 1 percent within the first hour of trading at the start of the that week although Boston Beer’s shares closed the week higher after crushing earnings.
The issue of the beer industry’s declining prospects should however not come as a surprise considering that it had already been highlighted in various forums such as the sixth annual meeting of the Malts event in the ArtQuest center at SteelStacks in Bethlehem back in March.
Chairman and founder of Boston Beer Jim Koch noted that there was indeed a softening demand of the craft beer category and the challenging environment had forced the company to focus on becoming more efficient and at the same time trim costs.
Of course, some pundits have argued that attributing one factor to the broader decline of the beer industry is a bit of a stretch and correlation does not imply causation. However, in this case, we have no doubt that the rapid increase in legal marijuana use has played a major role in weakening the multi-billion beer industry.
Changing sentiment towards marijuana
A number of polls conducted over the past couple of years show how most people are changing their views with regards to marijuana and this could be helpful in explaining how it factors in the beer industry.
According to a Pew study released in 2014, when asked whether marijuana or alcohol would be more harmful to a person’s health if marijuana were as widely available as alcohol, 69 percent of Americans said alcohol was more dangerous while only 15 percent said marijuana was more dangerous.
Scientific studies have also shown that cannabis is far less addictive than alcohol or caffeine and is also less lethal compared to many other commonly abused substances. To put this into perspective, scientists found that just 10 times the recommended serving of alcohol could lead to death while a marijuana user would have to consume 20,000 to 40,000 times the amount of THC in a single joint in order to risk a fatal dose according to a ruling by the Drug Enforcement Administration in 1988.
More recent reports further support these findings and it has been found that marijuana use is on the rise and people are actually spending more on it compared to alcohol. This is according to Headset which tracks cannabis transactions as it found that typical male customers spend about $647 annually on marijuana products whereas female customers spent about $634 over the same period compared to an average of $645 a year spent on alcohol.
An intensifying battle
The beer industry has taken note of the threat posed by increasing widespread marijuana acceptance and has understandably come out guns blazing. For instance, last year the Beer Distributors PAC, an affiliate that represents 16 beer distribution companies in Massachusetts gave $25,000 to the Campaign for a Safe and Healthy Massachusetts, making it one of the top three contributors to the anti-pot organization.
Similarly, in Arizona where medical marijuana is legal, the Arizona Wine and Spirit Wholesale Association gave $10,000 to a group opposing the Arizona Marijuana Legalization Initiative (Proposition 205) in the November 2016 election which ultimately failed to pass.
As we pointed out, the broader alcohol industry has been aware of this threat as a number of alcohol companies disclosed to investors via SEC filings that marijuana could pose a challenge to their bottom line.
A new report recently cited by Forbes sheds more light on just the extent to which beer sales could be affected if legalization increases. According to Cannabiz Consumer Group (C2G), the beer industry could lose more than $2 billion in retail sales due to legal marijuana.
The report revealed that 27 percent of beer drinkers said that they had already substituted cannabis for beer or would make the change if marijuana was legal in their state. In addition to this, it appears that marijuana is bringing disruption to the club scene as is evident by the increasing number of cannabis cocktails hitting the market.
While these drinks don’t contain alcohol, they do contain THC and where a Sativa strain is used, the drink induces an energizing mood, uplifting thoughts, increased focus and creativity which couldn’t be possible with alcohol.
Other cannabis companies such as Stratos have entered the beverage market with a tablet called Ascend which is mixed with a drink and doesn’t alter the taste or color while other companies like Prohibition Gold offer Potshotz, a pre-measured package of powder which contain 10mg of THC that can blend with other flavors.
In summary, fears that marijuana could massively contribute to the continued weakening of the beer industry based on the willingness of consumers to switch to marijuana do indeed have basis and merit. While this may not happen overnight, we believe it will ultimately depend on the pace at which pro marijuana regulations on the state level will be enacted barring any significant event.
As such, we recommend that our readers should adjust their portfolios accordingly in order to be prepared for this coming shift.
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