Can cannabis and spirits survive side by side?
Spirits producers face a new threat as legalised cannabis becomes an international phenomenon. SB discovers how brands are reacting to stop their market share going up in smoke.
“Cannabis cannot be stopped. It will not be stopped,” asserts Spiros Malandrakis, industry manager, alcoholic drinks, Euromonitor. In 2016, he predicted cannabis-based beverages would become the “biggest disruptor that ever was” to the US drinks market – a ludicrous supposition for many at the time. But the pace of the drug’s legalisation has quickened in recent months – and the spirits sphere is now standing to attention, wary about what competition will rise from this psychoactive player.
In 2017, Uruguay became the first country to legalise recreational cannabis use – and Canada is set to become the second, having passed the Cannabis Act in June this year. An amendment to the nation’s Controlled Drugs and Substances Act will legalise consumption, and regulate its production, distribution and sale from 17 October 2018.
“It’s been too easy for our kids to get marijuana – and for criminals to reap the profits,” tweeted Canadian prime minister Justin Trudeau following the landmark motion, which he hopes will curtail organised drug crime in the country. But while criminal activity and proper regulation may be front and centre of the political cause for change, there’s no shying away from the lucrative opportunities a legal cannabis market brings. Analysts have calculated that Canada’s cannabis industry (comprising medicinal use) was worth US$40 million in 2015 – a figure forecast to rocket to US$8bn by 2020.
Though cannabis is still prohibited on a federal level, US states have also been leaning towards decriminalising recreational use. Washington DC and eight states have already altered their laws, most recently California, where sales of recreational cannabis came into effect on 1 January. By the end of this year, the US’s legal cannabis market is projected to reach US$11bn in consumer spending, and more than double to US$23bn by 2022, according to The State of Legal Marijuana Markets, Sixth Edition released by Arcview Market Research in partnership with BDS Analytics. Globally, sales are forecast to hit US$32bn by 2022.
Those with their fingers on the pulse have made swift moves to be among the first tocash in on the opportunities cannabis presents. One such player is Southern Glazer’s Wine & Spirits, the largest drinks distribution company in North America, which in May agreed a partnership with cannabis producer Aphria to distribute its products throughout Canada.
“The cannabis market opportunity in Canada is tremendous, and we are very excited to be the first alcohol distributor to facilitate the legal distribution of cannabis in Canada,” said Doug Wieland, EVP and general manager, Southern Glazer’s Wine & Spirits of Canada. The group has established Great North Distributors, a wholly owned Canadian subsidiary of Southern Glazer’s Wine & Spirits, to be the exclusive representative for Aphria’s adult-use cannabis products in the region. “This is a significant opportunity for Southern Glazer’s,” Wieland said.
A growing threat
Excitement for the emerging cannabis market is palpable – but it is a growing threat to the alcohol industry. Should spirits producers be worried? “Yes. Cannabis is real competition, not only to spirits, but to the entire alcohol category,” warns Sid Patel, CEO of Beverage Trade Network, which will host the inaugural Cannabis Drinks Expo in San Francisco in 2019. “There was tobacco and alcohol, and now there is a third real big category – cannabis. Consumers will now have a choice: you want to grab a cocktail after work or go to a cannabis lounge?”
He’s not alone in his views. Euromonitor’s Malandrakis has been vocal about the dangers cannabis presents to the spirits trade, but sees opportunity if the two markets can forge a symbiotic relationship. “The pace of cannabis growth is insane,” he says. “The future of the alcohol industry is embracing and evolving into what I’d describe as a ‘responsible intoxication industry’ that will also include alcohol, and have options with either CBD or THC infusions or flavourings,” he says, referring to the active compounds in cannabis.
Some producers have already stepped boldly into this newfound territory, blurring the lines between cannabis and alcohol with novel products. Marie Brizard Wine & Spirits released Shotka, a cannabis-flavoured vodka, back in 2015, described as having the flavour of the drug without its narcotic effects.
Last October, Svedka Vodka and Casa Noble Tequila owner Constellation Brands announced its plans to move into cannabis-based beverages. The US group agreed to pay CA$245m (US$191m) to acquire a 9.9% equity in Canada-based cannabis producer Canopy Growth Corporation, the world’s leading provider of medicinal cannabis products. Commenting on the acquisition, which is expected to be completed in the third quarter of the company’s 2018 fiscal year, Rob Sands, president and CEO of Constellation Brands, said last year: “Our company’s success is the result of our focus on identifying early-stage consumer trends, and this is another step in that direction.”
Earlier this month, Constellation upped its stake in the cannabis market, injecting an extra US$4bn into Canopy Growth Corporation – the largest investment in the cannabis industry to date – giving the group a 9.9% equity share in the Ontario-based firm. “In Constellation we have a strategic ally that will join us as we lead the global cannabis sector into the future,” said Bruce Linton, chairman and CEO of Canopy Growth. “We have also strengthened our balance sheet to fund the ambitious expansion efforts we have planned heading into 2018 – a year that will see unprecedented growth in medical and adult-use opportunities.”
It seems like a smart move by a large drinks corporation – especially, as Malandrakis highlights, given the “stagnating” sales of alcohol in the west and the growing trend for low- and no-alcohol options. “We’ve seen that the core audience for low- and no-alcohol products these days are actually younger consumers,” Malandrakis explains. “These are consumers actively trying to cut down on alcohol consumption. For Generation Z, particularly, if they will have to choose a side, they will largely choose cannabis because of this low-alcohol trend.”
He adds that this is a real possibility across a broad consumer spectrum in western markets, where alcohol growth rates are static, in minor decline or minor growth, and low-alcohol libations are on the rise. “The western spirits world cannot afford to lose a significant part of these demographics because they would be in decline afterwards,” he notes.
The modern alcohol industry is on the cusp of one of the most radical changes in its history. How the global sector fares against this modern-day competition will depend on producers embracing the challenge to innovate further and, perhaps, embracing cannabis itself.
“In five to 10 years’ time, the social occasion, and social lubrication occasion, will not be monopolised by alcohol,” says Malandrakis. “It will evolve depending on the alternatives presented for how people would like to experience this high. We’re looking at a fundamental core change of the entire industry here, a radical change after centuries. Producers need to be proactive for spirits and cannabis to co-exist side by side. It has to start yesterday.”