Pubdate: Thu, 08 Mar 2018
Source: National Post (Canada)
Copyright: 2018 Canwest Publishing Inc.
Author: Mark Rendell
Page: B11


Canada seen as 'wonderful test market' for U.S.

Major alcohol companies will likely see sales squeezed by legal
cannabis in the coming years, according to Wall Street research firm
CFRA Research.

"Due to shared usage occasions, we view the legalization of cannabis
as a threat to alcohol industry consumption growth," wrote CFRA
analyst Joe Agnese, who covers the food and beverage and tobacco
industries, in a note published Monday.

Agnese cites Anheuser-Busch InBev SA/NV, The Boston Beer Company and
Brown-Forman Corp., best known for Jack Daniels Tennessee Whiskey, as
companies that could see a decline in product consumption.

"When I consider the use indications of the alcohol industry - when
it's consumed, who consumes it, that type of environment - alcohol
overlaps significantly with cannabis, whereas something like tobacco
doesn't," said Agnese, in an interview.

"While you are going to see a big shift from the illegal (cannabis)
market to the legal market, you're also going to have a lot of alcohol
consumers who don't consider cannabis, because it's illegal, moving
over to consuming cannabis, especially with the development of closer
alternatives such as infused beverages."

The question of whether legal marijuana takes of a bite out of alcohol
sales has been hotly debated in recent years, with some research
suggesting the two products are substitutes and other research
suggesting cannabis and alcohol sales are complementary.

Agnese, for his part, points toward 2017 research from the University
of Connecticut and Georgia State University that found, based on the
analysis of sales data collected by Nielsen retail scanners between
2006 and 2015, that monthly alcohol sales fell an average of 13 per
cent in states that had legalized medical marijuana.

"Canada's going to be just a wonderful test market for the U.S. to see
how it all plays out," said Agnese, referring to the upcoming federal
legalization of recreational marijuanause in Canada.

A number of large alcohol companies are already watching cannabis

"Although the ultimate impact is currently unknown, the emergence of
legal cannabis in certain U.S. states and Canada may result in a shift
of discretionary income away from our products or a change in consumer
preferences away from beer," wrote The Molson Coors Brewing Company in
its most recent filing with the U.S. Securities and Exchange
Commission. Both Boston Beer and Brown-Forman have likewise said they
're monitoring cannabis competition.

"The question is … once there's clarity around it becoming legalized,
how significantly does the alcohol industry get involved with the
cannabis industry? Do they participate through M and A or develop
their own infused beverages?" said Agnese.

In the fall, Constellation Brands Inc., which owns brands like Corona,
took the plunge, investing $245-million in Canopy Growth Corp. The two
companies are now working together to develop cannabis infused
beverages, that could be legal in Canada as early as 2019.

"Constellation had a Canadian wine business that they sold recently,
and they're more North American and local-market focused (than
companies like Anheuser-Busch). They're smaller, I think more mobile,
and probably better positioned and able to identify early trends,"
said Agnese.

For the big alcohol players waiting for a change in U.S. federal law
before investing in cannabis products, the shift could come sooner
rather than later, he said.

Counter-intuitive as it sounds, U.S. Attorney General Jeff Sessions's
decision to repeal the previous administration's Cole Memorandum -
which had reduced federal enforcement of cannabis offences - could
prove a catalyst for change, said Agnese.

"The revocation increases the possibility that one of the 93 U.S.
attorneys will act against an entity in a state that has legalized
cannabis. Due to strong bipartisan voter support for cannabis
legalization ... we believe any action taken greatly increases the
chances that Congress will act to ease cannabis regulations," Agnese
wrote in his note.
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