Dec 16, 2016 12:05 PM

Legal Marijuana Is Hurting Beer Business

Beer sales are shrinking in the states where marijuana was legalized for recreational use.

In three longtime craft beer meccas—Colorado, Washington, and Oregon—where recreational marijuana use is allowed, the beer business has collectively underperformed over the last two years, trailing behind beer sales around the country. According to Neilsen data cited in a recent report from Cowen & Company, the beer volumes in these states have dropped roughly 2 percent. Just in Denver, total beer volumes have fallen 6.4 percent year-to-date, and craft beer volumes have dipped 5 percent. In their turn, pot sales have grown.

For comparison, a 2014 report on the impact of marijuana on the alcohol industry showed that alcohol sales had been growing during the first 18 months after legalization.

Does Legalization Really Hurt Beer Industry?

The beer industry is more dominated by big players than almost any other field in the United States. Its four largest businesses account for roughly 90 percent of all sales.

While the ubiquitous cannabis legalization was continuing to spread around the nation, some alcohol business owners were afraid of such invasion—they were publicly expressing their anxiety about the effects rising marijuana consumption could have on the users and donating big money to anti-marijuana campaigns in the attempt to defeat November ballot measures.

But does marijuana really threaten the beer industry in the U.S.? Yes and no.

While retail marijuana sales opened in Oregon, Colorado, and Washington, the underperformance of beer in these states has worsened over the course of 2016. Given the fact that all these three states showed consistent growth in pot incidence among Americans 18-25 years old, there is nothing surprising. People simply prefer smoking weed to drinking alcohol. Cowen expects to see continued volume pressure on major beer companies.

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However, beer industry analysts are quick to caution that the Cowen report and Nielsen data do not necessarily provide the full picture. According to the available information, alcohol sales tax revenue has grown steadily over the past several years, both before and after marijuana was legalized for adult use.

So are beer sales increasing or decreasing, and why does the data differ?

In 2015, premises use reached over 3 percent of total shipments in Colorado, the highest percentage in the U.S. The figure does not take into consideration to-go sales and other ways brewers are selling beer. According to Alcohol and Tobacco Tax and Trade Bureau, premises use is up 57 percent in 2016. That could explain a large portion of any declines being seen. Meanwhile, the Colorado Department of Revenue reports that the consumption of beer in the state has increased compared to 2015.

There are numerous confounds, and many of the reports ignore important factors such as population growth, per capita consumption, unemployment, other parts of beverage alcohol, etc. They mostly analyze absolute consumption in any given year and look at sales in a place before and after the change in marijuana regulation. All of this tells us just a part of the story but does not provide the full picture.

Why Is This Happening?

Let us imagine that when providing their analysis experts took all possible variables into account and found a short-term relationship between the decline in beer consumption and marijuana expansion. It still does not mean that the data clearly demonstrates a causal mechanism between marijuana and decreasing beer sales.

The most common explanation for the beer-marijuana relationship is called a “substitution effect,” i.e. when consumers substitute one product for another. Here, it could further be broken into two mechanisms: 1) people have no money for beer because they spent it all on marijuana, or 2) they simply decide to substitute beer with marijuana.

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Let us look at the first case. While the legalization is known to cause a more disposable income for consumers, a recent paper by the Marijuana Policy Group showed that the average adult in Colorado might have actually spent less on cannabis in 2015 than they did in 2014. The MPG did not see a surge in demand, even despite the increase in marijuana sales (mostly driven by tourism and coming from the shift from the black to the legal market). The remaining small increase in internal demand can be explained by population growth in Colorado—the state gains additional 100,000 adults annually. Putting it all together will show that the average Colorado resident 21 years old or older has more money now than before.

As for the second case, we need to control other beverage alcohol sales, since total beverage alcohol varies less than the shift within the group between spirits, beer, and wine. Arguing that marijuana affects beer without looking at wine and spirits is wrong. Those experts doing so are missing the clear relationship between an increase in one and a decrease in one of the other two.

It is clear that marijuana has a huge potential in the long battle with alcohol, but it seems to be too early to draw any comparisons.

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