THE COWEN INSIGHT
With Colorado having voted to legalize cannabis 10 years ago, we analyzed nearly 20 years of government survey and spending data. We also looked at Nielsen and Cowen’s Consumer Survey, to examine the impact to alcohol. This proprietary analysis includes over 8 mm survey responses and underlying alcohol data from 38 individual states. Our conclusion: legal cannabis states are showing slower alcohol growth.
LEGAL CANNABIS CONTINUES TO GAIN MARKET SHARE
Ten years since Colorado voted to legalize retail sales for adult use cannabis, legal sales are now 1/10th the size of alcohol.
That’s up from only 2% five years ago, and reflects the notable benefits from the following:
- Incremental state legalization
- A helpful lift from COVID
As such, we believe that over the next 5 years, the cannabis category will add 4x the number of consumers as alcohol (vs. 2x over the last 10 years), as consumers increasingly embrace cannabis and temper their alcohol consumption.
CONSUMER RETENTION FOR CANNABIS VS ALCOHOL
Among 18–25-year-olds the embrace of cannabis versus the tempering of alcohol consumption rings especially true. In the past month, cannabis category retention has grown ~900 bps, to 67%, while past month alcohol category retention has fallen ~400 bps to 74% in 2020.
Consumers’ embrace of cannabis puts the marginal alcohol unit at risk, we believe. Our proprietary survey (N=~2,500) shows that over 60% of consumers who use cannabis report cutting back on drinking. In turn, we are seeing divergent revenue growth trends in states where consumers have access to legal cannabis. According to BEA data, states with access to legal cannabis are underperforming by 110 bps, while select Nielsen states show a 60 bps delta.
TAKEAWAYS FROM OUR PROPRIETARY SURVEY
Historically, the alcohol category in the U.S. has grown at a 5% CAGR. However, with more drinkers opting for longer periods of abstinence (in particular younger consumers), we think that trend alone will present a 100 bps headwind to industry volumes over time. Moreover, with cannabis consumers showing an outsized preference for spirits (as do younger consumers more broadly), we believe that annual price increases and continued premiumization will need to be increasingly necessary.
While cannabis growth is normalizing, we expect cannabis sales to advance 4.2% in 2022. On tougher COVID recovery comps, alcohol should grow 1.7% in 2022. With CT, RI and NY all set to introduce adult use sales in the coming months (followed by pending transitions in MD and MO, which passed ballot initiatives this year), we are adjusting our U.S. legal TAM. We now expect total U.S. legal cannabis retail sales of $26.5 bn in 2022 and $45.3 bn in 2027, which reflect modest upward revisions of 70 bps and 10 bps, respectively.
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