Canopy Growth (NYSE:CGC) rocked the cannabis industry in October when it announced a $245 million deal with Constellation Brands (NYSE:STZ), the maker of Corona beer and a long lineup of wines and spirits. Constellation bought a 9.9% stake in Canopy Growth and plans to market cannabis-infused beer.
Could more deals between alcoholic beverage makers and marijuana growers be on the way? The likelihood appears to be getting stronger than ever that there will be. There's one simple reason that more acquisitions and partnerships should be in store: the impact of marijuana legalization on alcohol sales.
What the numbers show
A paper published online in November by researchers at the University of Connecticut and Georgia State University identified an intriguing link between medical marijuana laws and sales of alcoholic beverages. The researchers used data on purchases of alcoholic beverages across multiple types of retailers for over 2,000 U.S. counties between 2006 and 2015. They then compared purchases of alcoholic beverages between counties located in states where medical marijuana laws were implemented to purchases in states where laws have not changed (including those that allowed legal use of medical marijuana prior to 2006).
What was the bottom-line conclusion? Counties in states where medical marijuana had been legalized saw alcoholic beverage sales drop by 15%. This sales decline wasn't just a short-term phenomenon. The research found significantly lower alcoholic beverage sales for up to 24 months after implementation of laws allowing use of medical marijuana.
This wasn't the first study to suggest that individuals could substitute marijuana for alcohol. Sixteen previous papers also support the idea that marijuana is used as a substitute for alcoholic beverages. Most of those studies, however, didn't use sales data like the University of Connecticut and Georgia State researchers did.
An even bigger impact on the way
This recent paper focuses only on the impact of legalization of medical marijuana on alcohol sales. But what about the impact of legalization of recreational marijuana? It only stands to reason that sales of alcoholic beverages could take an even bigger hit.
Most states that allow legalized use of medical marijuana require a patient to be diagnosed with an authorized condition. That's not a prerequisite for recreational marijuana use. Currently, recreational marijuana is legal in eight U.S. states plus the District of Columbia. That number is likely to increase.
My colleague Sean Williams recently identified five states that could put measures before voters in 2018 to legalize recreational marijuana. And that list didn't include New Jersey, which recently elected a new governor who promised to move forward with legalization in the Garden State. Just a few weeks ago, governor-elect Phil Murphy said that it's "full steam ahead" with plans to legalize marijuana and unleash a new $1 billion industry in the state.
It's even possible that the GOP's efforts to cut U.S. taxes could spur more states to legalize recreational use of marijuana. High-tax states could especially look for new revenue sources, with legalized weed a tempting target. And, of course, Canada is on track to legalize recreational marijuana nationwide in 2018.
Let's make a deal?
So what does all of this have to do with the likelihood of more deal-making for marijuana stocks? Other alcoholic beverage makers are undoubtedly paying close attention to the data showing declining alcohol sales in states where medical marijuana is legal. I wouldn't be surprised if they're seeing similar effects already in states like California and Colorado where recreational marijuana is also legal. They know they need a plan.
Constellation Brands already has its plan. At the time the Canopy Growth deal was announced, Constellation CEO Rob Sands said that his company's success hinges on "identifying early stage consumer trends." Joining forces with the largest medical marijuana grower in Canada made sense for Constellation.
Could some of Constellation's large peers be working on their own strategies to address the potential negative impact of legalized marijuana on alcohol sales? Anheuser-Busch InBev (NYSE:BUD) executives didn't mention the Constellation partnership with Canopy Growth or any marijuana-related plans at all during the company's third-quarter conference call. However, its former chief marketing officer, Chris Burggraeve, recently told Bloomberg that he sees marijuana as a trend that the alcoholic beverage industry shouldn't dismiss. In Burggraeve's words: "When consumers want something, you ignore it at your peril."
My hunch is that Anheuser-Busch InBev and other major players in the industry aren't ignoring what's going on. I also suspect that some of Canopy Growth's larger peers, particularly Aurora Cannabis (NASDAQOTH:ACBFF) and MedReleaf (NASDAQOTH:MEDFF), are being closely watched by some of the leaders in the alcoholic beverage industry. If more data confirms that legalized marijuana is making a significant dent in alcohol sales, look for more deals like the one between Constellation and Canopy Growth.