Lessons untapped: what cannabis can learn from alcohol
If cannabis continues to follow a similar path moving forward, we expect that tomorrow’s cannabis industry could look very much like the alcohol industry we have today.
Many hope that maturation is around the corner after 2019 was a year of growing pains for the cannabis industry. There appears to be some positive momentum, as certain markets around the world evaluate frameworks for legalizing cannabis. As the industry continues to grow, we think now is the perfect time for cannabis to take some lessons from an older peer on how it might get past its adolescent growing pains.
When it comes to these lessons, we think cannabis companies should look towards the alcohol industry as a north star. Many pundits have likened the cannabis industry to alcohol due to strict regulatory regimes and post-prohibition stigmas that plagued both. While alcohol prohibition may not have had the same global reach or tenure of cannabis prohibition, its comeback from being prohibited in one of the world’s largest markets to becoming a popular regulated consumer product should not, in our view, be overlooked.
Alcohol Prohibition
Alcohol prohibition was a ban on the production, import, distribution, and sale of alcoholic beverages. While the term is often associated with the United States, other countries around the world, including Canada, implemented some form of alcohol prohibition at different points throughout the 20th century.
United States alcohol prohibition began in 1920 and lasted until 1933, when Congress passed the 21st Amendment, ending the national ban on alcohol. While Canada abolished federal alcohol prohibition in the late 1920s, provincial bans still limited consumption into the 1930s, with Prince Edward Island finally doing away with prohibition in 1948.
As the proverbial cannabis walls start to fall around the world, here are some valuable lessons we think the cannabis industry can learn from alcohol’s rise:
1. Horizontal integration can be a successful model
In alcohol, few major players control the end-to-end supply chain, across agriculture, manufacturing, distribution, branding, marketing, retail, and ancillary operations. Large conglomerates might focus on manufacturing and branding, but they typically outsource harvesting and rarely operate end-user selling points. In the United States, this is in part due to a regulatory system that limited vertical integration, as well as the fact that growth often leads to specialization. Horizontal integration, with companies focusing on what they do best while forming partnerships to drive growth, has been an effective business model in alcohol. We think it will be similar in cannabis as well.
2. Science and technology can power growth
Scientific understanding and technological innovation helped power alcohol’s global growth. From pasteurization and automated bottling operations to crop protection and rapid transport options, innovation and IP has helped pave the way for the industry’s commercial growth throughout the 20th century. For example, AB InBev and Heineken are currently duking it out over disputed keg-tapping IP that the companies say could be critical in providing consumers a superior draught beer experience. Cannabis, too, may benefit from game-changing science leading to intellectual property moats playing a larger role in the industry as it continues to grow.
3. Consolidation is likely on the horizon.
In the alcohol space, the top five spirits players account for around 48% of the global premium spirits market. Similarly, the top five beer players make up roughly 46% of the global branded beer market. These conglomerates have purchased critical intellectual property, bringing many brands under a small number of roofs. In 2019, there were 38 acquisitions in the beer industry and 35 acquisitions in the alcohol industry, increasing 65% and 21% respectively since 2018. We see this trend happening in cannabis too, where larger players will likely absorb many of the smaller ones as the industry matures.
4. We still see room for craft.
In Canada, the craft beer market accounts for about 6% of all beer sales, having grown from ten to over 650 craft breweries since 1985. This is even more dramatic in the United States, where craft beer sales currently account for more than 24% of the country’s beer market. We see a similar place for local and craft cannabis, where a subset of consumers may opt for small batch, locally produced products.
5. Some consumers are eyeing the premium market.
With access to many different novelty ingredients from around the world, some consumers have been willing to buy higher priced alcohol products such as Don Julio 1942. According to the Distilled Spirits Council, high-end premium and super premium spirit products increased in revenue by 8.9% and 10.5% respectively in 2018. Some cannabis companies have already taken note of these consumer preferences and products like gold rolling joints and kief-covered rolling papers are available in some recreational markets.
Having reviewed the pitches of over 2,000 cannabis start-ups, we’re already seeing some of these trends reflected in the cannabis space. Vertical integration in cannabis appears to be limited to the small number of companies that have the resources to do so, and consolidation among the rest seems likely. Craft producers may squeeze some market share from large conglomerates. And consumer preferences will likely mature, giving both innovative and premium products room to grow.
It’s worth remembering that the alcohol industry wasn’t built immediately. Initially, customers at Ontario’s LCBO couldn’t take a bottle of booze off the shelf themselves, much like they can’t touch cannabis in the province’s first retail stores. If cannabis continues to follow a similar path moving forward, we expect that tomorrow’s cannabis industry could look very much like the alcohol industry we have today.
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