What the advent of legal cannabis use means for spirits

15th November, 2019 by Lucy Britner

As the legalisation of cannabis continues, so too do the questions around its relationship with spirits. SB analyses changing consumer behaviour, the new wave of CBD drinks and the evolving regulatory landscape.

Debate continues over the impact cannabis may have on spirits consumption

Cannabis is causing a few headaches in the drinks industry. This nascent category has seen beverage companies either invest millions – billions at Constellation Brands – or retreat to the watchtower to “monitor the situation”.

Overall, there is no question that the cannabis sector itself is expected to be enormous. Vivien Azer, an analyst at investment bank Cowen & Co who specialises in cannabis, anticipates the category could generate around CA$12 billion (US$9.03bn) in sales in Canada alone by 2025, driven by an increased frequency of use and a shift away from the illicit market. Meanwhile, a July report from the Informs Marketing Science journal suggests the “recent wave of recreational cannabis legalisation across the US could generate US$22bn in sales per year”.

There is conflicting information, though, about whether or not the spirits industry will be affected by the continued legalisation of cannabis. This year, US trade group the Distilled Spirits Council moved to dispel “misinformation” about the impact of cannabis on alcohol, while other studies have suggested the drug – along with other consumer trends – will be a disruptor, threatening to eat into sales.

“With the industry already headed in a low- and no-alcohol direction, a future where THC [the psychoactive component of cannabis] replaces ABV in alcoholic beverages is on the horizon,” says Spiros Malandrakis, head of alcoholic drinks research at market researcher Euromonitor International. “Reshaping millennia-old drinking rituals and providing an alternative to social lubrication occasions, cannabis should be either embraced as a symbiotic opportunity or faced as a potentially detrimental antagonist for an alcohol industry already on the defensive.”

So far, beer companies are the ones out in front. In terms of investments, notable deals include Constellation’s US$4bn-plus stake in Canopy Growth and Molson Coors’ joint venture with Hexo. (Though Constellation does own wine and spirits brands, almost two-thirds of its fiscal 2019 revenue came from beer.)

‘Monitoring the space’

When it comes to spirits producers, the big players are playing it safe, with Diageo and Pernod Ricard confirming to The Spirits Business they are still “monitoring” the space. There is movement, though, from the start-ups and smaller players, with companies such as Top Beverages and UK producer Halewood Wines & Spirits looking to get ahead with new launches.

For the moment, new product development is all about CBD – the non-psychoactive cannabinoid associated with health benefits, including analgesic properties.

Although the US Alcohol and Tobacco Tax and Trade Bureau (TTB), in line with the US Food and Drug Administration (FDA), does not yet permit the use of CBD in alcoholic beverages, several European markets are open for business.

“In 2018, the UK took CBD off the list of banned substances,” explains Nick Pullen, co-founder of CBD spirits company Top Beverages. The firm has released a CBD craft gin and a CBD craft rum, positioned at the luxury end of the market. The products, which are 54.5% ABV navy strength, carry an RRP of £30 (US$36) per 100ml bottle, and the company is working on larger formats (500ml) as well as other CBD products.

“By adding CBD, we feel we are on par with – or out in front of – current trends,” says Pullen. “We don’t feel we have any competitors.”

Dead Man’s Fingers is a CBD-infused rum

Also in the vanguard, though at a cheaper price point, is Halewood Wines & Spirits, which rolled out Dead Man’s Fingers Hemp Rum to the UK this July. The CBD-infused spiced rum is set to push innovation in an otherwise stale part the rum category, says brand manager Lucy Cottrell. The product carries an RRP of £22 (US$27) per 700ml and has also launched in Germany.

When it comes to talking about CBD, though, Halewood and Top Beverages have different ideas. “We don’t disclose the amount of CBD,” explains Halewood’s Cottrell, saying the company does not want to get into debates around whether the rum has more or less CBD than other products on the market. For Halewood, the launch is more about flavour innovation in the category. “We talk about hemp in the same way gin brands talk about botanicals,” she says, adding that as an alcohol brand, any discussion around CBD’s health benefits is off the table.

At Top Beverages, Pullen wants consumers to have all the facts about the CBD content of his products. “We are concerned that the drinker has every piece of information – we did six months of research to find the right CBD and we list the ingredients on the website,” he says. “Consumers should ask questions around how much and what type of CBD is present. Hemp seed oil, for example, is derived from the same plant but it has no CBD in it.” Top Beverages’ rum and gin each contain “10mg of premium full-spectrum CBD”. The website also lists the CBD’s components as well as EU regulation requirements.

‘Taking risks’

Though their opinions on communicating CBD differ, both companies agree their moves are under close scrutiny. “Big players will let companies like Top Beverages take risks; they will watch the space,” says Pullen. “We hired outside counsel to look at our processes and procedures, knowing that we were going to be in the vanguard.” Cottrell adds: “People will be watching us, seeing how we are doing.” However, she urges other companies to take heed of consumer trends or risk being left behind. In terms of THC, Pullen says Top Beverages is “not comfortable” with using the psychoactive component with alcohol. What he does predict, though, is a future for THC in non-alcoholic spirits, echoing wider consumer trends, as well as Euromonitor’s Malandrakis’ belief that THC could “replace ABV”.

From replacing alcohol with weed to altering leisure habits, the increased acceptance of cannabis is changing consumer behaviour. “With strong levels of observed substitution, we continue to see cannabis as a risk to alcohol,” writes Cowen & Co’s Azer, in a note to clients.

In a recent survey of consumers in Canadian provinces Ontario and Alberta, Cowen & Co found that in the month of May, people who used both cannabis and alcohol generally reduced their levels of alcohol consumption.

“Specifically, in both provinces, roughly 70% of cannabis consumers report drinking less during a cannabis occasion – which is higher than the 64% of US consumers who report the same [behavioural] change,” says Azer.

Using research from Deloitte, as well as Cowen & Co’s own report, Azer says 41% of consumers in Canada use recreational cannabis “as an alternative to alcohol”. But it’s worth noting that she also says the category that will face the biggest headwinds is beer.

Top Beverages’ range

While it may seem as though spirits are in the clear, Paul Hletko, founder of Few Spirits in Illinois, identifies a new problem. Hletko, who was on a panel at this year’s Tales of the Cocktail discussing the future of cannabis and alcohol, called ‘Cannabooze 2025’, says increased cannabis legalisation will alter consumer habits.

He describes a “change of channel”, whereby cannabis consumers “increasingly stay at home to consume, and thus consume alcohol at home, rather than in restaurants and bars”.

“That is bad news for restaurants and bars,” he says, adding that there is already a push for ‘cannabis lounges’. There will also be a knock-on effect for smaller spirits suppliers that often rely on the discovery of their products via the on-trade, he says. “Anything that reduces their business has a risk of harming smaller suppliers as well by removing the discovery moment.”

As the consumer continues to change, regulators, too, are attempting to keep up with new realities.

The regulatory landscape is at best fresh, and in many cases still being forged. In Canada, for example, where cannabis beverages are expected to hit the shelves in mid-December, guidance was finalised in late June.

In the US, recreational cannabis use is now legal in 11 states, as well as the District of Columbia. Most have their own nuances and, as previously stated, the FDA is yet to give the green light to CBD in alcohol.

Dosage concern

Rob Sergent, managing director at Utah’s Alpine Distilling, which this year exhibited at the Cannabis Drinks Expo in San Francisco, expresses concern that “experiences, dosages and quality” of CBD and THC products will “vary wildly” without some type of FDA involvement.

“We’ve recently seen the FDA put a firmer foot down on manufacturers, and I project this will only get more intense as more people enter the market,” he says.

At Top Beverages, Pullen says he is a proponent of more regulation, believing it will help to “weed out bad actors”.

And it seems new markets are not the only ones trying to keep up with changing trends. Tech companies, too, are still trying to get their heads around how to treat CBD – let alone THC.

According to Halewood’s Cottrell, paid-for Facebook adverts for CBD get blocked, while ordinary posts do not. Amazon, she says, does not list anything containing CBD, and some payment providers also block CBD products. “It’s an area they are really missing out on,” she adds.

Whether or not you believe the hype, the ongoing legalisation of cannabis is already changing the spirits industry, influencing both consumption habits and new product development. Logic would have us believe, then, that it won’t be long before the big players leave their towers and enter the fray.

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