Following the 2012 initiatives in Colorado and Washington that legalized the recreational use of marijuana, questions started to be asked around the wine business about the substitution effect of pot and wine. Even more interesting to me is to think through, why the wine industry would even ask the question?
The reason the question is being asked is everyone in the wine industry has been feeling uncomfortable with sales trends for some time, and we are all trying to pin down the root causes for the changes. Many have already concluded cannabis is hurting wine sales.
While I've avoided talking about cannabis in the Annual SVB State of the Industry Report up to this point, this year because of the trends I'm seeing, I felt it necessary to take this subject head-on.
You can sign up [here] to receive a link to the 2019 SVB Wine Industry Report and the live videocast which will take place on January 16th this year. But here are some of the thoughts I'll present on wine and weed within the report this year.
The Conflicting Opinions
One analyst who reviews state tax data concluded that at least for Colorado and Oregon, there was no material change in alcohol consumption post-legalization. That's one vote against a link.
Earlier in 2018, collaborative research between the University of Connecticut, Georgia State University and Universidad del Pacifico Lima concluded alcohol sales dropped 15 percent in states when new medical marijuana laws were approved. They concluded marijuana was a strong substitute for alcohol. So that's one vote for a strong link.
On the other hand, research released in Sweden this year covering observations from 1989–2016 among more than 140,000 adolescents concluded that marijuana was neither a substitute nor a complement for alcohol. That's a vote for a new vote category.
Nobody has been even thinking about the case of cannabis being a complimentary good for wine. (For everyone who forgot their Econ 101, an example of a complimentary good is popcorn and butter. Butter sales would be higher if popcorn sales increase.)
So how do we reconcile the conflicting research?
The Current Facts
Placing a pin on it, let’s say about 13 percent of adults today are regular consumers of cannabis. Regular wine consumers on the other hand represent around 60 percent of the adult population.
We could just pretend marijuana users are just now discovering the product, except the Cannabis Consumer Coalition conducted a well-run consumer study and determined that among other things, 64 percent of current legal marijuana buyers have been users for 10 years or more. That makes it harder to argue that legalization alone is having a major impact on current wine sales.
The Initial Conclusion
Furthermore, for marijuana legalization to seriously impact wine demand in a negative way, we have to try and rationalize how the impact is suddenly taking place now, when 64 percent of current legal marijuana users inhaled before legalization.
Averages don't always tell the whole story however. After digging in to the data a little more, there was one consumer segment where we might indeed see some level of substitution taking place.
The Case for Substitution in the Millennial Cohort
While cannabis use spans across all generations and all indications suggest the strongest growth cohort for cannabis is in the boomer generation, the description of the weighted average age for regular cannabis users today would be a 26-year-old male. So it is possible - to the extent there is a substitution for wine, that it would likely be felt in the younger consumer demographic.
The chart here represents information I pulled together from several different research reports and sources. Considering the difference in the size between the regular consuming base of cannabis (~13%) and alcohol (~60%) consumers, the chart depicts graphically the relative preference for beer, liquor, wine and cannabis in the adult population of the US.
Millennials, the group on the left of the slide, show the strongest preference for spirits, beer and cannabis among all cohorts at present, but the lowest preference for wine.
The fact that millennials have the most cannabis users and fewest regular wine consumers could be signaling a level of substitution in the youngest wine consumers. While other factors could account for the above results too, we can say with a good level of certainty that cannabis legalization isn't helping increase demand for wine in millennial consumers.
When you get a chance to read this year's report, you will also see how millennials are evolving in their consumption trends for wine. (A small hint: It's not good news.)
The SVB State of the Industry Report
I feel the 2019 report is perhaps the most important piece I've written because the business is quite clearly at a tipping point and change is required for the industry to see the kind of success to which it's become accustomed for the past 25 years. I'm really looking forward to presenting the results to you in our Annual Report Release and videocast on January 16th.
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