Wine Distributors: Legalized Pot vs Prohibition

 

Thirty-seven states have liberalized the 1970 Federal Controlled Substance Act with respect to marijuana use. Thirty-five now allow medical marijuana. Two states; Colorado and Washington have fully legalized recreational and medical marijuana use. Oregon, Alaska, and Washington D.C. are expected to do so in 2014.

 

Two weeks ago I spoke to a large group of high-level sales people and distributors. I enjoy talking to this particular group because I get real-time unfiltered intelligence from very experienced business people. Outside of all the expected discussion of supply, demand, sales tactics, competition, pricing and the like, there was a surprise discussion on the impact of legalized marijuana on wine sales.

 

I hadn't given the subject much thought at all, so I was surprised there was such an advanced conversation going on already. It was kind of a Rip VanWinkle-like moment for me. Everyone there seemingly had a well-thought and defined perspective already. I felt like I was walking in on the wrong conference. Based on the discussion however, I thought it was time to look a little closer and decide for myself. Here's the hypothesis:

 

 

Fact or fiction: The legalization of cannabis will impact wine sales.

 

The Colorado Ganjapreneurs

 

According to one of the wholesalers from Colorado, the ski industry there went through a big change this year with skiers flying in from out of state and stopping at the drive-thru ganja shop on the way to the slopes. In a twist of Wine Tourism, there are entrepreneurs who are setting up travel based on marijuana tours and tastings and a whole economy getting set up surrounding the unrestricted sales of herb.

 

Colorado did have a record ski year and some attribute the success to "ganjapreneurs," but I don't know for certain that the creative business flowing from legalized pot was the sole reason. I suspect the lack of snow in the Sierras played a role too.

 

That said, the sales people at this event seemed to believe pot smokers were skipping an evening glass at the bar for an evening toke. Many, if not most believed there was a drop off in wine sales as a consequence. Another ancillary data point was purportedly one of the wine stores across the street from a recreational pot store in Denver saw wine sales drop 30% after legalization in January. That was a perplexing data point.

 

Reefer Roundup

 

I don't think there has been a lot of non-biased research on the subject thus far. What's out there seems like research that's done with a pro or con agenda. So deciding if there will be a new threat to wine requires us to look at economics from a social perspective, and history for some clues.

 

With nothing useable as a model for pot, I went to alcohol which has a longer and well documented past. I was able to glean from Alcohol and Temperance on Modern History that America's thirst and taste for alcohol has indeed evolved due to social views, costs, and law. Here is a quick timeline:

• 1770 - England cuts off rum and molasses sales. By 1790, whiskey made from corn and rye was called a "patriotic drink" and rum wasn't available.
• 1820 - "Patriotism" went astray with the heavy use of whisky, cider and beer peaking and Americans were drinking about as much as their bodies could metabolize. Wine wasn't very available.
• 1825 - The Temperance Movement started and by 1840, half of America abstained completely.
• 1840 - European immigrants from Germany and Ireland brought their own consumption cultures.
• 1870 - Civil War era taxes on spirits caused people to switch to beer which was cheaper
• 1890 - Americans consumed as much alcohol from beer as spirits
• 1910 - Alcohol consumption again peaked at 2.6 gallons per drinking aged person.
• 1917 - Moral persuasion from Temperance combined with grain shortages from WWI made alcohol anti-social
• 1920 - Prohibition caused alcohol consumption to drop by more than half but for those who did drink illegally, beer fell out of favor because it was bulky. Bathtub gin became the drink of choice.
• 1933 - Prohibition ends and beer consumption gets faster acceptance because brown spirits took time to age. Consumption averages a low 1.5 gallons per drinking person because of The Great Depression and those raised in the 20's were less likely to drink.
• 1945 - Drinking increased during WWII perhaps because of a 'live for today' mentality but with post-war prosperity, consumption was lifted to 2.3 gallons per person mostly from beer sales.
• 1970 - Twelve percent of alcohol consumption came from wine as Boomers eschewed their parent's cocktails
• 1980 - States increase drinking age to 21. Social awareness campaigns reduce beer and wine consumption by twenty percent, and spirits by 40%.



When I review all that, I should think the legalization of  marijuana, just like the end of prohibition ought to increase marijuana consumption. But does it follow that it would decrease wine consumption?

 

The wholesalers at the sales conference seemed split down the middle. Some held that legalization would actually increase consumption of wine to combat a medical side-effect of marijuana called "cotton mouth." They also thought at the same time it will increase salty snack sales to fight another phenomenon called " the munchies" which oddly also causes cotton mouth and perhaps more wine consumption.  Maybe we should invest in Ritz Crackers?

 

Measuring PPH

 

Personally I have no clue what underground or aboveground pot sells for these days and that should have a place in the discussion. I found the following citation regarding a small town in Colorado:

"Prices, including state taxes of 21 percent, are around $360 an ounce for high-quality strains. That’s about one-third above the black market street price, but seniors, active-duty military and veterans receive a 5 percent discount."

It's possible legalization could decrease the consumption of wine if the PPH (Price per High) were dramatically cheaper as was the case in 1870 when heavy taxes on spirits caused a switch to beer. For that to happen, consumers have to also view marijuana as a substitute for wine. I'm certain that it's not a pure substitute, but I can't say the degree to which it can be considered a substitute.

 

My Conclusion

 

When I sort through the hypothesis, I doubt the legalization of marijuana will have any meaningful impact on wine sales and particularly high-end wine sales - at least today.  

 

Culturally there doesn't appear to be any negative pressures that could decrease wine consumption as was the case with the Temperance Movement in 1825.

 

To believe pot will substantially hurt wine sales, the presumption has to be made that high-frequency wine consumers are pot smokers and they view it as a good substitute. 

 

According to the Wine Market Council, the high-frequency consumers are responsible for 90% of wine purchases above $20. We also know that today its the Boomers and Gen X'ers ... people older than 35 who are buying most of the wine over $20. According to information regarding cannabis consumption shown in the chart, most pot users are less than 28 years old and consumption drops of substantially after age 35.

 

So for today, I'm concluding it's fiction to think legalizing marijuana will impact wine consumption and the wholesaler's who think legalized pot is a threat in those active legal states, have misread the situation. What I can't answer is the question about tomorrow.

 

Looking at the history timeline above, the people raised in the 1920's during Prohibition never did become part of the alcohol consuming public after repeal. So from that I also take people develop their views of wine and probably weed when they are young. With Legalization there will be more recreational pot consumers. If societally marijuana consumption is fully accepted, the price per high is favorable, and tourism and experience is built up and added to legalization as is happening in Colorado, I can see how in ten years we might indeed see wine sales impacted. 

 

What do you think? Do you have examples of legalized marijuana negatively impacting wine sales? You have any guesses you'd like to share with the SVBonWine community and my friends from the sales conference?

 

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