Is the real threat to the alcohol serving industry is it going to be: "Recent survey data confirms that a majority of consumers reduce their alcohol consumption with cannabis, while younger adult consumers are most likely to avoid dual-use altogether." Poly impairment caused by legal cannabis may create a higher legal alcohol risk with dramshop. Servingalcohol.com
Brave New World for Booze as "Bud" Looks to Blaze New Trails in the U.S.
Source: Cowen
May 30, 2017
The Cowen Insight
Over the next 14 months, we expect to see four more states transition to legal cannabis, accounting for 14.5% of overall beer volumes (and 16.2% of total alcohol volumes). Recent survey data confirms that a majority of consumers reduce their alcohol consumption with cannabis, while younger adult consumers are most likely to avoid dual-use altogether.
Cannabis Staring Down Beer's Barrel
New proprietary survey data continues to point to potential disruption of beer trends from cannabis use. Results from our U.S. survey show over 60% of consumers reduce alcohol consumption when using cannabis, with ~30% reporting "drinking a lot less." Furthermore, dual-use remains uncommon among cannabis users as less than 20% of users reported regular dual-use of cannabis and alcohol. To be sure, these trends could impact the alcohol category as a whole, but we believe beer is most at risk as our surveys in Canada and the U.S. showed cannabis users over-index to beer. As such, we believe the combined impact of decreased consumption and drinking occasions could result in incremental pressure for an already challenged category.
Outsized Impact on Younger Adults
Young adult cannabis users in the U.S. are less likely to mix cannabis and alcohol according to our survey, with roughly half of adults ages 18-34 saying they mix the two at least occasionally, compared to over 60% of older adults. We believe this lower likelihood of complementary use partially explains why we've seen alcohol incidence fall while cannabis incidence has risen, as more young adults are substituting the two social lubricants. Given that young adults tend to boast higher per caps and also prefer beer, the headwinds for the beer category could prove notable with increased cannabis use. In Canada, we saw similar trends with younger adults being less likely to mix the two, while young adult alcohol incidence has been on a steady decline.
New Cannabis States Create New Challenges
Four more states will begin adult-use retail sales over the next 14 months, starting with Nevada which will begin transitioning to adult use in July. These 4 states represent 14.5% of U.S. beer volumes, almost 3x the 5.3% contribution from current adult-use cannabis markets. As highlighted in our previous work (here), we've seen a slowdown in per capita alcohol tax revenues in 3 of the states that have legalized cannabis. With 20% of U.S. beer volumes set to be in adult-use states by mid-2018, we'll continue to watch how tax revenues in these markets trend post legalization.
Stock Implications
We remain cautious on Market Perform rated TAP, given the company is the #2 player in the U.S. and Canada (where adult-use sales will begin no later than July 2018). Meanwhile, we remain bullish on STZ given its more balanced portfolio across alcohol categories, which also under-indexes to cannabis users. In cannabis, we continue to favor KSHB and TPB in the U.S. as well as WEED in Canada, as these companies should benefit from robust growth in the legal cannabis market.
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Jim Peters Responsible Hospitality Institute Phone: 831.438.1404
Email: Jim@RHIweb.org<mailto:Jim@RHIweb.org>
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