For centuries, people have turned to alcohol products to unwind after a long day, to celebrate with friends, and to mark special occasions. Now that legal cannabis has entered the scene, the alcohol industry’s dominance over the recreational market may be coming to an end. Cannabis industry analysts and business leaders suggest that cannabis may hold the keys to the kingdom, representing a vast opportunity for profits and continued growth among recreational users as an alternative to alcohol products.
Competitive Advantages of Cannabis
Nine U.S. states and the District of Columbia have passed recreational marijuana legislation in the past three years. More states are putting the finishing touches on their own legislation, and the country of Canada is expected to have recreational cannabis legalization laws on the books in the coming months. This groundswell of support for recreational weed has industry analysts excited about the recreational markets springing up across the country.
Alcohol is typically consumed only as a beverage. Cannabis, on the other hand, lends itself to a variety of products, including smoking the cured flowers, creating tinctures, edibles, beverages, and vaping liquids. This versatility provides a strong competitive challenge to alcohol’s dominance on the recreational scene. One industry analyst suggests that cannabis meets more consumer demands and satisfies consumer motivations better than alcohol ever could, and believes that as the commercial cannabis industry grows, its biggest players may even target alcohol producers for acquisition.
Another potential competitive advantage on the recreational market is a belief that cannabis is safer than alcohol. Users of recreational marijuana believe that it does not impair them in the same way that consuming alcohol might. This belief is especially prevalent among younger users, a potent demographic in recreational cannabis and alcohol markets. Whether cannabis is safer than alcohol is up for debate, but those who tend to believe in this may prefer recreational weed over alcohol products, helping to spur growth in a fast-growing market.
Threat or Opportunity?
Many alcohol producers are eyeing the emerging recreational cannabis market as a threat, as cannabis represents an alternative to alcoholic drinks. The cannabis industry’s profit pool is massive, approaching the entire amount of the alcohol industry’s profit over the past three to five years. As more states and Canada adopt legalization legislation, the profit potential is sure to increase dramatically. Industry estimates suggest that the recreational market for marijuana alone will account for $40 billion in sales by 2020; if more states join the legalization initiatives taking shape, that profit may soar to unexpected highs.
The fact remains that consumer motivations and needs are similar between those who use cannabis and those who use alcohol products. Based on the aforementioned competitive advantages of the legal cannabis market, however, cannabis can meet needs that alcohol makers simply cannot approach. Still, the smartest companies on both sides of the recreational market are seeing consumer demand as an opportunity, rather than a threat.
In many cases, such as in Canada and in several U.S. states where legalization legislation has passed, the alcohol control board oversees the commercial cannabis industry. This gives both markets a bit of uniformity when it comes to regulation, helping to pave the way for lucrative partnerships. Some alcohol companies have invested heavily in licensed cannabis producers, both as a means of getting a piece of the profits as well as to expand market offerings.
There will always be overlap in the customer base between alcohol and cannabis, so these partnerships could create synergies that can be leveraged, producing products that meet consumer demands no matter what their recreational preferences are. Alcohol companies are exploring the marijuana market for new beverage ideas and perhaps even the development and production of nutraceutical products. Both alcohol and cannabis producers are also looking at other strategic partnerships across markets, including cosmetics, pharmaceuticals, food, and beverages, just to name a few. The goal is to improve market penetration, and partnership suggest a path forward for all of the major players in these ever-growing markets.
Partial ownership of growing cannabis companies and their incredible profitability may also help struggling alcohol producers to weather downturns in their own markets. In the current landscape, industry analysts are seeing alcohol companies purchasing partial or total stake in some of the largest commercial cannabis companies. It is expected that as the cannabis market grows, the reverse will be true: cannabis firms snapping up alcohol companies in merger and acquisition strategies. This shift is expected within the next three to five years.
Finally, consumer goods personnel — particularly alcohol business executives — are in great demand by the cannabis industry. Consumer goods and alcohol executives have the skillsets that smart cannabis businesses need to thrive; the market is filled with great business ideas but little in the way of executive experience. Injecting seasoned business executives into the mix will strengthen the companies that employ such personnel, helping to create stability in an ever-fluctuating market. Alcohol executives, for their part, have many commonalities with the cannabis market’s needs, including marketing and promotional strategies, production efficiency initiatives, and automation, all of which will bring consistency and quality into the commercial cannabis industry. The future of partnerships between alcohol and cannabis companies may be several years away, but early moves suggest that these partnerships will work to create a flourishing, robust market economy.
Recently, the U.S. Department of Veterans Affairs (VA) changed its language on their website to suggest that the department is open to researching the effects of medical marijuana as a viable treatment option. On the VA’s website, a recent update suggests that research towards the benefits of medical marijuana for Veterans may finally be opening up.
The VA is seeking to clarify its position pertaining to the VA and marijuana. According to the VA Website, they understand that several states have approved marijuana use for medical use. They also reiterate that marijuana and all derivative products are still classified under federal law as a Schedule One controlled substance. Therefore, it is still illegal under federal government laws.
What Does the FDA Have to Do With the VA?
Since the U.S. Department of Veterans Affairs is mandated to follow all federal laws and the Food and Drug Administration still classifies marijuana as a Schedule One drug, VA doctors and health care providers are not allowed to recommend it or prescribe it to veterans.
However, they are allowed to discuss marijuana use with their patients as part of an overall care plan. This is where the “waters get murky.” The VA states:
- Veterans are still allowed access to VA benefits when marijuana use is reported to their healthcare provider.
- These same Veterans are encouraged to discuss all drug use with their providers.
- The provider will record marijuana use in the veteran’s record as a means to help with treatment planning.
- Clinicians at the VA may not recommend medical marijuana.
- Clinicians may not provide any paperwork for Veterans to allow participation in state-approved marijuana programs.
- Pharmacies at the VA are not to fill any prescriptions for medical marijuana.
- Funds from the VA will not be used to pay for medical marijuana prescriptions.
- Any state laws regarding the possession of marijuana are not in effect when on VA grounds. The VA is a federal facility and federal laws govern any federal facility.
In addition, Carolyn Clancy, M.D. Executive in Charge, emailed a directive to employees of the VA on December 15, 2017, to provide clarification on the VA’s stand on medical marijuana. Some items in the directive include:
- Reason – The Veterans Health Administration (VHA) directive is to provide guidance on access to VHA clinical programs for all Veterans who participate in State-approved marijuana programs.
- Summary of Major Changes – The major change in policy is to add additional support to the Veteran-provider relationship when discussing the impact on health and use of marijuana for any Veteran-specific treatment plans.
This language gives hope to medical marijuana advocates that the VA is finally opening up to investigating the effects of medical marijuana on health problems faced by Veterans, including post-traumatic stress disorder (PTSD).
Marijuana Moments Tom Angell originally reported the change by the VA’s Office of Research & Development. Their website refers to earlier research on medical marijuana saying that in their review they “found limited evidence” where marijuana use helped reduce pain in some patients. In addition, it found that medical marijuana “might reduce spasticity associated with multiple sclerosis,” but found little evidence to determine the direct effect of marijuana on PTSD. VA doctors are not currently able to prescribe medical marijuana to Veterans, but they can look at marijuana as an option in treating medical problems faced by Veterans.
This leads many in the healthcare and marijuana industry to have hope in one day using medical marijuana as a possible treatment option for suffering Veterans. However, this new stance directly conflicts with VA Secretary David Shulkin’s recent letter that announced there would be no agency research on marijuana due to its federal classification as a Schedule I substance.
Shulkin’s letter was in direct response to a request for clarification made by the House Committee on Veterans Affairs. The U.S. House members want the VA to begin investigating the potential effects of medical marijuana for veterans who suffer with chronic pain and PTSD. Representative Walz, ranking member of the House committee said that Shulkin’s response to their request was “disappointing and unacceptable.”
He went on to say that the VA did not answer their “simple question,” but that they also made an attempt to mislead the committee by claiming, “without citing any specific law, that VA is restricted from conducting research into medical cannabis, which is categorically untrue.”
It seems as if Shulkin has been caught pointing the finger at the FDA for the VA’s lack of interest in researching the benefits of medical marijuana for Veterans.
Pressure Towards the VA Mounts
A recent poll, funded by the American Legion, found that more than 9 out of 10 military veterans desire additional research into medical marijuana and its benefits in treating ailments faced by veterans every day. The new poll by the nation’s largest veterans service organization shows:
- More than ninety-two percent of veterans who support the expansion of research into medical marijuana
- Eighty-three percent of veterans believe that medical marijuana should be legalized by the federal government
- Over eighty percent also favor allowing VA doctors to recommend medical marijuana to their patients
American Legion spokesman, Joe Plenzler, told The Cannabist, “We already know that greater than 80% of the American public supports research into the efficacy of medical cannabis. What this survey shows is that America’s veterans feel even more strongly about the need to study cannabis and its potential in treating PTSD, chronic pain and other ailments veterans face every day.”
How the House Committee on Veterans Affairs is Helping
The 10-member group who sit on the House Committee on Veterans’ Affairs, is currently urging the Trump administration to study the benefits of medical marijuana for military veterans. Congressman Tim Walz (D-MN) understands the importance of medical marijuana research and how access has become a critical issue to veterans.
The House Representatives who joined Walz in urging President Trump to act include:
- Mark Takano (D-CA)
- Julia Brownley (D-CA)
- Ann McKlane Kuster (D-NH)
- Beto O’Rourke (D-TX)
- Kathleen Rice (D-NY)
- J. Luis Correa (D-CA)
- Gregorio Kilili Camacho Sablan (D-MP)
- Elizabeth Esty (D-CT)
- Scott Peters (D-CA)
In response, Congress passed a defense bill in December that opened the door for medical marijuana to be approved by the Department of Defense. President Trump signed HR-2810 into law on December 12 which gives the Department of Defense the authority to approve any medical devices or drugs for members of the armed forces, stepping on the toes of the FDA.
The demand for recreational marijuana has increased considerably. Most industry observers predict that there will be a recreational marijuana shortage in 2019. What is causing this shortage?
Supply and Demand
Health Canada, the department responsible for issuing production licenses for marijuana growers, more than doubled the number of production licenses in 2017. Unfortunately, this has not balanced the supply/demand ratio. Regional supply imbalances in provinces that only allow sales through government-run retail outlets and unmet cultivation targets from producers are thought to be the culprit.
Often, what is on paper does not pan out in real life. This is true for the Canadian marijuana industry. The amount of paid-for production capacity is more than enough to meet demand for 2019. In fact, companies have been spending hundreds of millions of dollars in order to boost production.
The Marijuana Policy Group
A Denver based company called the Marijuana Policy Group (MPG), has provided analysis and policy advice to the Canadian government and private clients. They found that Canada’s publicly traded licensed producers have funds available to produce 1,370 tons of cannabis for this year and the next. MPG believes that this supply is actually three times more than needed to serve the legal cannabis market in the coming year.
The supply and demand problem leads to two key questions:
- How much of Canada’s 992 tons of black market marijuana can it bring into the legal market in the next two years?
- How successful will producers be in meeting their cultivation targets?
MPG predicts that Canada will take approximately 40% of the recreational cannabis black market share. This equates to almost 400 tons of marijuana in the first year. For producers, this means that they only have to meet 35% of their cultivation capacity in order to meet market demand, MPG estimates.
According to Miles Light, co-founder and partner with MPG, “Licensed producers are well capitalized in Canada, making it easier for them to ramp up production in the first year. Supply may be limited initially but should ramp up sharply after a few months…Legal demand won’t be 100% of the market. Some portion of that will be supplied by home growing, and some is going to be supplied by the same black market that exists today. Then you have what’s being already supplied in the medical market.”
Currently, Canada’s licensed medical cannabis production is almost 83 tons per year.
Where Is the Cannabis Shortage?
MPG predicts that any shortage of cannabis will not be from production and cultivation of cannabis, but rather from market distortions. Retails and wholesalers who sell the marijuana after it is produced are thought to be responsible for the market shortfall.
Light predicts, “You’re unlikely to have a systematic shortage or bottleneck in cultivation, but there may be bottlenecks further down the supply chain, especially in distribution and retailing.”
What is the reason for this “bottleneck” effect? Provinces such as Ontario and Quebec have opted for government-run retail monopolies creating a shortage of sales outlets. Ontario and Quebec account for two-thirds of the overall population in Canada. Even with this large percentage, there will only be around 70 adult-use marijuana outlets in 2019. In comparison, there are 1,066 government-run liquor stores and 250 illegal marijuana dispensaries in these two provinces.
Regional market imbalances may be seen regionally. Some areas may have too much marijuana and other areas may not have enough. In contrast, provinces that allow for private-sector retailors will see many entrepreneurs help the bottleneck by opening outlets with a larger selection of products and a wider range of prices. According to Khurram Malik, partner with Jacob Capital Management in Toronto, regional retail networks will be key in alleviating the bottleneck in distribution.
This equates to an inventory surplus in the market before there is excess supply. According to Malik, if there are only 50 stores in Ontario when 500 are needed, there will be an “inventory glut” before the market sees any supply surplus. This surplus will benefit smaller producers, who will be able to produce at a higher utilization rate.
The Big Picture
The larger issue is going to be the variety of products available for sale. What are consumers going to demand? What are they willing to buy? Will the products sold in the regulated markets satisfy the demand of consumers?
The initial in-demand strains of marijuana, which includes edibles, will not be a part of the initial legalization rollout. President of the Cannabis Commerce Association of Canada, Ian Dawkins, explains it best by comparing cannabis sales to alcohol sales.
He surmises that a government run liquor store would not be very successful if it only sold three kinds of rum. Instead of settling for a limited choice, Canadians would be “lining up at the border to ship in the U.S.” Dawkins is a principal consultant of British Columbia-based Althing Consulting.
He also predicts that the best way to approach the supply problem is to quit focusing on total weight. Instead, he believes that the shortage will be in particular sub segments that larger licensed producers (LPs) do not understand.
Some LPs, however, are attune to market demands. Canopy Growth, a major licensed producer that trades on the Toronto Stock Exchange under the symbol WEED, is offering a diversified product offering by recognizing that the demand will not be for one particular product, but a wide variety of marijuana products.
This means that successful companies must offer cannabis varieties grown by a diverse set of producers. More customers are attracted to a store when there is a wide variety of products for sale. This holds true in all retail outlets across every type of product sold.
Therefore, in order to meet the high demand for recreational marijuana, Canada must:
- Ensure that there is adequate production of marijuana to meet market demand
- Allow for private companies to fill in for government run shops when there is an area that has bottlenecked
- Lift restrictions on private companies to allow them to compete in all provinces
- Offer a wide variety of products by resourcing from many different producers
- Listen to market demand and adjust as needed
Canada stands on the precipice of recreational marijuana legalization. Ensuring that all Canadians have access to and choice of recreational marijuana will determine how successful it will be.