THE TD COWEN INSIGHT
Access to legal cannabis continues to drive a migration away from alcohol in the U.S. and Canada. Alcohol sales in legal cannabis states have underperformed by 100-150 bps over the past 5 years. With $29B in sales in 2023, we expect U.S. cannabis sales to grow at a 7% CAGR over the next 5 years, as the category is set to gain 18M past-month users (while alcohol could lose 2M users).
LEGAL CANNABIS NOW COMPETES WITH ALCOHOL
Legal cannabis is now a formidable competitor to alcohol. 11 years since Colorado voted to legalize retail sales for adult use cannabis, legal sales are now 11% the size of alcohol. That’s up from only 4% five years ago and reflects the notable benefits of incremental state legalization. As such, we believe that over the next 5 years, the cannabis category will add 18M past-month consumers, while alcohol will lose 2M past month consumers, as consumers increasingly embrace cannabis and temper their alcohol consumption.
CONSUMERS CONTINUE TO EMBRACE CANNABIS CUTTING INTO ALCOHOL PURCHASES
Among 18–25-year-olds cannabis’s category retention opportunity holds especially true. In the past month, cannabis category retention has grown ~1,000 bps, to 68%. Meanwhile, past month alcohol category retention has fallen ~400 bps to 74% in 2022.
Consumers’ embrace of cannabis puts the marginal alcohol unit at risk, we believe. Our proprietary survey (N=~2,500) shows that over 2/3 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 over 100 bps, while select Nielsen states show a ~140 bps delta. Meanwhile, the 5-yr alcohol volume CAGR for adult use cannabis states has underperformed non-cannabis states by 150 bps in IWSR.
ALCOHOL ABSTINENCE AND CANNABIS ARE HEADWINDS FOR ALCOHOL
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. And, 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.
U.S. LEGAL CANNABIS SALES PROJECTIONS
While cannabis growth is normalizing, we expect cannabis sales to grow 11% in 2023. Comparatively, while on tougher COVID recovery comps, alcohol should grow 3% in 2023. With recent adult use activations in New York, Connecticut, Missouri, and Maryland, as well as pending transitions in Minnesota and Ohio, we are adjusting our U.S. legal TAM. We now expect total U.S. legal cannabis retail sales of $29B in 2023 and $37B in 2027.
CANNABIS AND ALOCHOL CONSUMER BEHAVIOR
Among cannabis consumers, we can see that past month consumers are frequent users in the category. According to the NSDUH, over 47% of past month consumers use cannabis on a daily or near daily basis (20-30 days/month).
Meanwhile, based on our proprietary survey data, we can see that alcohol consumers who are taking breaks skew young. Not surprisingly, our proprietary data also shows that past month cannabis users who drink alcohol are more likely to participate in intentional abstinence than drinkers who have never used cannabis.
IMPACT OF CANNABIS ON ALCOHOL
For the alcoholic beverage names under our coverage, we believe that the near-term impacts of cannabis conversion have proven manageable, especially as the industry is taking outsized pricing today. That said, on a medium- to long-term basis, positioning in advantaged subcategories, like bourbon and tequila, and annual price increases will be increasingly important.
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