Guelph brewers not anticipating sales drop when recreational cannabis use becomes legal

September 20, 2018

TIt’s been a long week. The boss has been extra strict, you’ve had to clock in some unexpected overtime and extra tasks were piling up. But it’s Friday night, and you finally get a chance to rest for the weekend.

For many, this means going home, throwing on a comfortable T-shirt and cracking open a beer or making up a quick cocktail.

However, come Oct. 17, Canadians will have another legal option, and that could spell financial woes for the makers of those alcoholic beverages.

In June, consulting firm Deloitte released a report on what Canadians can expect when cannabis becomes legal later this fall. Among the findings is an expected drop in the sales of alcohol.

“Our research is showing double-digit cannibalization of beer and wine and spirits consumption once it gets launched,” says Jennifer Lee, a partner with Deloitte and its national cannabis leader.

“When you have discretionary spending, you’re trading off. The big debate was whether it was a compliment or a substitute. Our data is showing double-digit substitution.”

Lee says that Deloitte has found that people view the uses of alcohol and cannabis in very similar ways, and with only so much money to spend, people may not make that stop at the LCBO or Beer Store, but instead pop into a dispensary.

“Both products, liquor and cannabis, are highly social products, and that Friday night glass of wine may be substituted for a cannabis product to relax you after a long week,” she says.

“The reason we say that is 66 per cent of our respondents say they use cannabis to relax or sleep, 62 per cent say it’s to reduce stress and anxiety, 58 per cent said to have fun with friends — we just take those top three, and we see it ties in closely to the perceived benefits of a glass of wine or a beer or a spirit.”

And Canadians won't be shy with their wallets — according to Deloitte's report, Canadians are expected to spend more than $7 billion on cannabis products in 2019, the first full year of legalization. 

So what does that mean for brewers, winemakers, distillers and everything in between?

For two of Guelph’s craft brewers, the answer is not that much. Who should be concerned, they say, are the big time players in the industry.

“Realistically for us, we’re just really focusing in on what we really do well,” Brad McInerney, the marketing manager for Wellington Brewery, says.

“In terms of the correlation, I think the big brands, it’s more of an issue for them, or at least they believe it’s more of an issue.”

“Bigger companies that need to move more volume, it may have more of an impact on them,” adds Cam Fryer, co-founder of Royal City Brewing.

“I can’t see this as having a much of a market impact on us as it would on a bigger brewery.”

On Oct. 17, cannabis will only be legal in plant and oil form. Edibles are not expected to be legal until October 2019. However, that has not stopped some from getting a head start on that eventual market, which are expected to make up more than half of sales when they do become legal.

In October 2017, New York-based Constellations Brands, the company behind Corona beers, Svedka vodka and a wide range of American wineries, announced that it would be purchasing a 9.9 per cent stake in Canopy Growth Corporation, a medical marijuana company based out of Smith Falls, Ont., looking to be one of the major players when recreational cannabis becomes legal.

That investment was worth $245 million, and included collaboration on the development of cannabis-based drinks.

This past August, Constellation announced it would be investing an additional $5 billion, giving it a 38 per cent interest in Canopy.

“This is an extremely exciting time to be part of what could potentially be one of the most significant global growth opportunities for the next decade,” Rob Sands, Constellation's CEO, said during an investor conference call at the time of the multibillion-dollar deal.

Also in August, Molson Coors Brewing Co. announced it would be starting a venture with The Hydropothecary Corporation, now branding itself as HEXO, to develop a non-alcoholic cannabis-infused product.

"We believe, potentially, it's got really significant potential and we're going to learn a lot and if other markets start to open up in due course and this becomes federally legal then we'll be in a good place at that point in time," Molson Coors CEO Mark Hunter said during a conference call at the time.

As well, the Canadian Association of Professional Sommeliers announced it would launch a nationwide series of cannabis education classes centred on the infused wines they anticipate will be available here next year.

While some industry giants are looking to invest millions in this space, both McInerney and Fryer say this is something the Guelph craft brewers will not be looking at, albeit for different reasons.

“The main reason why is any cannabis liquid consumable will be non-alcoholic,” Fryer says.

“Making a non-alcoholic beer is actually very difficult, and we don’t have the capacity or equipment to do it. At this point in time, it’s not something we’re looking into.”

“It would be quite a big change for us to move into something like that,” McInerney says.

“Certainly, we’ve had conversations over the last few years, but it’s something that doesn’t really make a lot of sense for us.”

McInerney adds that when it comes to the craft beer market, Wellington Brewery is going after different consumers than the large brewers are. And it’s because of that that he and his colleagues in the craft brewing industry are not as concerned.

“When people are looking at our products and our beer, they’re looking for something very specific, whether it’s a specific beer or a specific flavour profile,” he says.

“That’s really what we’re focused on.”

Not all big brewers are getting in on the cannabis game, however. Scott Pederson, Sleeman Breweries’ marketing director, says that the Guelph brewer, the third largest in the country, is not looking at getting into the marijuana market at this time.

Getting drinkable cannabis to market

While craft brewers are sticking to what they know best, others are looking to get into the cannabis market as soon as it becomes legal to do so.

One of those companies is the Toronto-based Province Brands.

While many companies are looking to create drinks that already mimic the taste of known products, and then adding cannabis’ psychoactive components to them, province is doing something different — brewing a beer using cannabis itself.

Dooma Wendschuh, the company’s co-founder, says the drink will be dryer than a typical beer, with a flavour comparable to some beers infused with non-active hemp that are already on the market.

Wendschuh says the move to get into producing a cannabis-based drink, a drink that would come with all of the effects of smoking a joint without the smoking part, was borne from creating an alternative to alcohol.

“People are beginning to realize the harms that alcohol brings to their health and well-being. We want to provide a healthier and safer alternative to alcohol,” he says.

“This is a chance to change the world, and create a healthier alternative to alcohol.”

Lee says Deloitte expects the drop in alcohol sales will grow once edibles and other consumable forms of cannabis become legal in Canada.

“If you think about it, there’s still a stigma around the current form that’s going to launch in October,” she says.

“When it starts to turn into a format like a beverage or a brownie or a gummy bear, you’re suddenly going to have huge sociability and less stigma, and that is where we see and we estimate where the erosion is really going to take off.”

Wendschuh says that a drop in alcohol sales would be a good thing.

“At the end of the day, consumers don’t need both,” he says.

“I wouldn’t say that they’re fully substitutional products, but if you look at the venn diagram, there is a substantial overlap between what cannabis is able to provide and what alcohol is able to provide.”

High trends south of the border

While pre-made drinkable and edible forms of cannabis will not be legal come Oct. 17, the same cannot be said in other parts of the world where recreational marijuana is already legal.

In the United States, recreational cannabis is currently legal in nine states. And with legalization has come a number of businesses looking to get into the lucrative marketplace.

In Washington state, where recreational cannabis has been legal since 2012, one of those companies is Tarukino, which produces everything from non-alcoholic beers and sparkling wines, to sparkling water to sexual lubricant — all infused with tetrahydrocannabinol, better known as THC. THC is the main psychoactive component in cannabis.

Jason Lander, Tarukino’s chief marketing officer, says edible and drinkable products are a way for wary customers interested in giving cannabis a try, but do not want to smoke it.

“It’s one thing to take some flower, roll up a joint and smoke it. It’s another thing completely to eat an edible or drink a drink,” he says.

“It makes it much more approachable.”

Others have gotten out of the alcohol business, and have moved into the world of weed. One of those people is Keith Villa, the creator of Blue Moon Belgian White, a popular wheat beer brewed by MillerCoors. Villa retired from the brewing giant in January. A few months later, he announced he was getting into cannabis.

Villa says he has been experimenting with cannabis since it became legal in Colorado at the end of 2012, and is now launching Ceria, which he says will taste like beer but feel like weed.

“We’re seeing the prohibition of marijuana start to fail because people are seeing it’s not this evil drug that’s the downfall of society that so many would have us believe,” he says.

In Washington and Colorado, Lander and Villa have found that cannabis can and has filled the same use in the market as alcohol, which Lee says will happen in Canada.

“The idea that you can drink cannabis and have that same sort of social component you would have by drinking alcohol, getting the effects of being high from a product like this instead of getting drunk, it appeals to a lot of people,” Lander says.

“Cannabis and alcohol both give people a social way to relax or to socialize with other people,” Villa says.

“Both remove a little bit of that stress that people have at the end of a long work week or work day. People want to unwind and relax, and alcohol can do that. Cannabis can do that.”

And the sales figures have shown just that in those states where cannabis is legalized.

Speaking with beer industry website Brewbound in November 2016, Vivien Azer, a managing director and senior research analyst specializing in the beverage, tobacco and cannabis sectors, said beer markets have underperformed in U.S. states where cannabis is legal.

According to Azer, economy beer volumes were down 2.4 per cent and premium domestic volumes were down 4.4 per cent in Colorado, Washington and Oregon — all states where cannabis is legal.

Azer added that, at the time, the craft beer market was also seeing a decline in Colorado, but was still growing in Oregon and Washington.

Part of that decline, Villa says, is that there is only so much money for people to spend, and now there will be options for them.

“That consumer who has a limited amount of dollars to spend for the weekend, they’ll get to spend those dollars in the way that makes the most sense to them.”