No, Marijuana Legalization Isn't Crushing Craft Beer

Published January 11, 2017
Fool.com

Let's put the issue to rest once and for all: Legalized marijuana is not hurting beer sales. At a time when the beer industry as a whole is trending down, pinpointing one factor and saying it is the reason seems to be a stretch.

Image source: Getty Images.

A toxic brew?

While the controversy got a lot of attention before the November elections because the Massachusetts beer distributors political action committee made a contribution to an anti-legalization campaign in the state (which lost) and was extrapolated to mean the "beer industry" was opposed to legal weed,the issue gained new traction recently after analysts at Cowen & Co. suggested that because beer sale volumes were down 2% in states like Washington, Oregon, and Colorado, all of which have legalized marijuana and have seen consumption grow, one was the cause of the other.

Although the analysts contended megabrewer Anheuser-Busch InBev (NYSE: BUD) was more at risk because it controls some 70% of the U.S. beer market following its acquisition of SABMiller, craft beer should also be worried because its sales were slowing, too, though not to the same degree.

It would seem intuitive that should be the case. Both smoking marijuana and drinking beer are seen as culturally acceptable, are used in social settings and as a means of relaxation, posses a perception of low-risk of harm from their usage, and more. Not to mention the industry itself lends credence to the theory.

Leading craft brewer Boston Beer (NYSE: SAM) has noted in its annual filings with the Securities and Exchange Commission that "certain states are considering or have passed laws and regulations that allow the sale and distribution of marijuana. It is possible that legal marijuana usage could adversely impact the demand for the Company's products." Similarly, distiller Brown-Forman (NYSE: BF-B) has noted legalization as a potential risk as well.

Clearing the air

Still, that's hardly an indication the adult beverage industry is worried about the matter, and an argument can be made that craft brewers, at least, are embracing marijuana.

Image source: Dad & Dude's Brewery.

Last year, industry site Beer Advocate wrote about Colorado-based craft brewer Dad & Dude's Breweria successfully selling cannabis-infused beer while California's Lagunitas Brewing believes there's a symbiotic relationship between the growth of craft beer and the call for legalization, one that extends all the way back to Prohibition.

The craft beer industry's trade group Brewers Association recently took a closer lookat the report from the Cowen analysts and came away thinking their argument that marijuana legalization was contributing to beer's downfall was lacking. It found no data supporting a "substitution effect" of drinkers suddenly pushing back from the bar and smoking marijuana instead, and saw no indication legal weed was replacing "beer occasions" since no one controlled for other factors, like sales of wine and spirits.

Perhaps most pertinent was what the Cowen note didn't look at. For example, in Denver, the analysis used Nielsen scan-point of sale data showing a 6.4% year-to-date decline in beer sales and a 5% drop in craft beer sales to arrive at the conclusion marijuana was impacting beer. What it failed to consider was the 57% growth experienced in on-premise sales. According to the Brewers Association, Colorado has the highest percentage of on-premise sales of any state in the nation so with the growth that segment experienced, it likely accounted for the decline seen in packaged goods. Moreover, when you look at excise tax data, Colorado actually saw consumption rise year over year, suggesting the "lost sales" were not really lost at all, but merely shifted to a different channel.

Image source: Getty Images.

A complementary mix

There's no reason to think marijuana and beer (and wine and spirits, too) can't peacefully coexist or actually support one another.It seems as though a single data point was extracted to prove a point, but there are a lot of factors that likely contribute to the beer industry's decline. Beer drinkers have been rejecting mass-produced brews for some time now, and with an overproliferation of craft beer choices and with millennials searching for new flavors and tastes, a decline in sales is not wholly unexpected.

Moreover, because marijuana use has proliferated for years despite it being illegal, it's highly unlikely drinkers are suddenly turning away from hoisting a pint and sparking up a joint simply because it's now legal.

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Rich Duprey has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Anheuser-Busch InBev NV and Boston Beer. The Motley Fool has a disclosure policy.