Question that’s been much on minds of regulators, alcohol marketers and distributors has been effect of cannabis on alcohol.  Most cannabis consumers drink alcohol quite regularly, New Frontier’s research shows.  So what happens when both are legal?  Speaking at Cannabis Forum put on by BevNet last week, New Frontier’s chief knowledge officer John Kagia saw a bifurcation.  Among young adults in an environment where cannabis and alcohol are equally acceptable, 54% believe cannabis is safer than alcohol, and therefore intend it to displace some of their alcohol use in the future, an insight that has “seismic implications,” Kagia said.  Among key barriers is that of onset time: “waiting 45 to 90 minutes to get elevated can be problematic,” Kagia said, but some cannabis brands are getting to 10- to 15-minute range and even close to 5-minute mark.  At that point, it “becomes a direct substitute.”  Still, it’s not an entirely either/or proposition: he cited a “remarkable” cannabis-infused gin he’d encountered that might point to one product development avenue. (This article is excerpted from longer piece in our sister publication Beverage Business INSIGHTS.) 

Questioner wanted to know why, if consumers use both ingredients, the alc cos are so fearful.  Kagia offered several rationales.  For one, so far cannabis use has been occurring in isolation because there aren’t many public venues where it can be legally consumed.  Once we see the advent of social spaces like lounges, cafés and bookstores “people will be making that choice, and we’re already seeing indications that people make that choice,” he said.  Further, since New Frontier’s research shows that consumers view mixing alcohol and cannabis as dangerous, they’re often choosing one or the other.  He also noted there’s a chance that young people won’t develop a palate for alcohol, keeping them away from category most of their lives.

Other Half in Brooklyn easily one of the hottest craft brewers in NY metro area in recent yrs, growing from just 1,000 bbls in 2014 to 14,000 in 2018. Its double IPA releases often create long lines and sell out almost as soon as they go on sale.  So it was striking to read interview with Other Half co-founder and brewer Sam Richardson in Brewing Industry Guide, in which he acknowledged the way the game has changed, in favor of taprooms.  “We are now almost more of a hospitality company than a brewery,” Sam said. “We’re trying to take care of people who come.  So much of our business is direct to consumer, and we’ve realized that this is how we have to focus our energies.”   That includes not just its original brewery in Brooklyn, but a “second spot” in Williamsburg just four miles away and a barrel-aged and sour facility (with tasting room, natch) in Rochester.  “What we’re trying to do,” said Sam “is create more direct-to-consumer situations. That’s one of our strengths.” 

Neither Williamsburg nor Rochester will produce very much beer, but will provide other oppys for Other Half to “engage” with consumers directly.  Sam explains: “The problem with the industry right now is the older model, which is breweries going only to distribution.  Your margins are so terrible until you get to a really large size.  Then when you get to that large size, you’re vulnerable because it’s so hard to be nimble and change. That’s where the fear is right now.  We’re not getting much bigger and we’re just trying to have more direct consumer opportunities.”  Other Half is just one of many small brewers that grew rapidly in recent years, mostly outside the traditional 3-tier system.

Beer biz still waiting for the sun to shine in ’19, at least volume-wise.  Domestic brewers’ taxpaid shipments off 223K bbls, 1.5% in May, estimates Beer Inst economist Michael Uhrich.  That was 4^th straight dropoff, pushing yr-to-date estimate to -439K bbls, 0.7%.  Add in 246K-bbl increase for imports thru Apr and reported US shipments -193K bbls, -0.2% yr-to-date.  That tracks off-premise scan data in Nielsen, -0.4% thru Jun 8.   Not awful, but Jan-May shipments comp pretty easy: -2% same period last yr.  Distrib orders for Jun not exactly lightin’ it up either, we hear.

Final panel at Natl Conference of State Liquor Admins this morn clearly set up to analyze US Sup Ct decision over Tenn residency law.  That didn’t happen.  Still, didn’t stop “rank speculation” by panel members.  Most interesting chatter was suggestion by panel moderator Brannon Denning to keep an eye on who signs decision.  Given past precedent and which Justices have penned which decisions so far this yr, very good chance that either Chief Justice Roberts or Justice Alito will be the author, Brannon and others on panel believe.  Roberts’ opinions tend to be narrow, Brannon noted; he’s been on both sides of key dormant Commerce Clause/discrimination issue and he said little during oral hearing.  So, tuff to tell where he stands on this case. Would be “easy to see Roberts punt,” said atty John Neiman (ex-clerk for Justice Kennedy), and come with quite narrow decision focused on Tenn law alone, and reject more sweeping approach sought by both sides.  Judge Alito tho, had some “tough questions” for defenders of law during hearing and is “steadfast” supporter of Commerce Clause. He could take different approach. 

Meanwhile, NBWA general counsel Paul Pisano advised that whatever decided, language likely to be parsed, argued over for years, just like Granholm, which many thought pretty clear cut when it came out.  His advice for regulators: “Be cautious, be slow….we’ll all be fighting about the language,” regardless.  Paul also posed possibility that “spasm” of alcohol cases could follow in wake of Tenn decision, given pending cases on state pricing laws, retail shipments across state lines and other key topics. 

 MC’s big FMB bet Cape Line variety pack one of top 10 growth brands in Nielsen all-outlet for 4 weeks thru Jun 8. Yet it only sold 105,000 cases for 4 weeks and 154,000 cases (11,000 bbls) yr-to-date.  Cape Line total 178K cases across all flavors.  So it’s not yet helping a heckuva lot, as MC volume down 5% for 4 weeks ($$ down 4%) and down 3.7% yr-to-date.  And MC losing 4.2 share of FMB volume for 4 weeks, compared to 3.9 yr-to-date.  In all FMBs got 6 of top 10 growth brands in latest 4 weeks, including 3 White Claw, Truly Assorted and Naturdays.

Last ditch effort to craft new bill to legalize recreational cannabis in NY died on last day of legislative session, without even being introduced.  Talks between both houses of state legislature and Gov Cuomo broke down over weekend, reports NY1. It’s “dead for now,” state senator Liz Krueger, who sponsored bill, texted on Wednesday morn (as reported in Wall St Jnl).  Both houses expected to pass bill further decriminalizing.  The failure to legalize recreational cannabis in NY and NJ this yr represents a setback for pro-legalization forces. 

Long piece this past weekend in Washington Post focused on “potent pot” and “vulnerable teens” in Colo and Wash.  This article one of a growing number that raise red flags about moving too quickly to legalize cannabis.  Paper cites five fold increase (to 777) in # of visits in 2015 compared to 2005 to Children’s Hospital Colorado facilities for “treatment of cyclic vomiting, paranoia, psychosis and other acute cannabis-related symptoms.”  Here are a couple of sample quotes in Wash Po: “Underage kids have unbelievable access to nuclear strength weed,” said Andrew Brandt “whose son got hooked while in high school.” A Colo psychiatrist chimed in: “Horrible things are happening to kids.”  And Harvard psych prof Staci Gruber sez: “The brain is abnormally vulnerable during adolescence. Policy seems to have outpaced science.”  

Washington Post article just one of several recent more cautionary pieces in print media, such as NYT op-ed INSIGHTS Express excerpted earlier this week, Illinois article on how “unprepared” police are for “pot-impaired drivers” and much more. Next big marker of progress for cannabis biz will be when Canopy Growth reports earnings later this week.  Canopy and US-based Acreage Holdings “expected to approve Wednesday the landmark deal joining the two companies upon a relaxed stance toward federal prohibition in the US,” wrote Market Watch.  Another high-flying cannabis co Lighthouse Strategies (Two Roots and Cannabiniers) presented at BevNet’s Cannabis Forum late last week, talking up co’s deals and competitive advantages.  So is US moving full speed ahead towards legalized cannabis or flashing yellow lights of caution?

Constellation Brands stock fell almost 3% yesterday following Guggenheim analyst Laurent Grandet’s report lowering earnings estimates in advance of quarterly report.  This is just one of several recent reports (Morgan Stanley, RBC) projecting slower growth for Constellation beer in latest qtr (Mar-May) and for Guggenheim, potentially going forward.  Laurent cited several factors as he lowered projection for quarterly “net organic sales” for beer to 5.5%, including “poor weather contributing to softer volumes in key markets such as” CA and TX, “increased Corona promotions, driving stronger can volumes, more than offset by lower pricing” and “softer gross margin due to the higher promotional activity on Corona Extra cans.”  Guggenheim remains “neutral” on stock, but “our negative thesis remains unchanged given” that “1)growth of the beer portfolio is decelerating, 2) It is structurally difficult to grow longer term with the key Mexican import brands contractually limited to only the US, and 3) the speculative investment in Canopy makes the stock significantly riskier to own.”  Seeking Alpha took note of “Guggenheim gloom,” and pointed out Constellation stock down 11% in last mo, tho it’s up yr-to-date. 

Corona Franchise Slows Lots in Scan Corona franchise also under increasing pressure as Laurent sez.  Total franchise dipped from 45.8% of Mexican imports to 44.7% for 12 weeks thru May 18  in Nielsen, he shows.  And Corona and Corona Light dropped from 42.1 to 38.6 of Mexican imports.  (Unstated but one reason for that is continued double digit growth of Modelo Especial.)  What’s more Corona franchise up just 0.8% in 4 weeks thru Jun 8 in Nielsen all outlet.  Still up 4% yr-to-date. But up 7.5% for full yr 2019.  Interestingly, Constellation gaining 1 full share of $$ yr-to-date this yr, just slightly less than last yr.

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Beer biz shifting to high end brands and segments in earnest across all off-premise channels mid-way thru 2019. Above premium segments now 50 share of all beer $$ yr-to-date thru Jun 8 in Nielsen all outlet data, +2.9 share. Same gain but even higher share for 4 wks. And gained same 2.9 share of volume to 40 share all outlet for 4 wks. Tho high end more developed in grocery stores, over 60 share of $$ and nearing 50 share of cases, pricier beer comin’ on quickly in convenience stores too. All above premium brands up 3.5 share of $$ to 45.7 in Nielsen c-store data for 4 wks thru 6/8. Even up over 3 share of cases to 33.7 share.

Shift to above premium in c-stores driven by two usual suspects, natch. Modelo Especial turned up heat last 4 wks, up near 17%, gained 0.9 share of cases to 5.2 in c-stores. Mich Ultra still a little bigger, “slowed” a skosh to +11.3%. Still gained 0.7 share and hit 5.6 share of convenience volume. So these 2 brands already well over 10 share of beer volume in c-stores and half of share shift to above premium in channel. But don’t go thinking seltzers are just a grocery phenom. Top 2 hard seltzer brands tacked on 0.9 share of cases for 4 wks to 1.1. White Claw grabbed near 0.65 share to 0.8, with top assorted pack already a top-10 above premium brand in c-stores. Truly brands up over 0.2 share of cases to 0.3. Then too, some other high-end improvements over last 4 wks as Corona Extra volume +0.1% (vs 1% decline YTD) and Heineken +5%. Just 2 of top-10 above premium brands down for 4 wks in Nielsen c-stores (Dos Equis, Bud Lt Platinum). But premium and below? It’s a rout. Top 10 brands in each price segment all down for 4 wks. Total economy volume off over 5%. Premium decline now -9.5%, gettin’ dangerously close to double digits, slipped below 40 share of cases.

Day one of National Conference of State Liquor Admins — annual confab of state regulators and industry attys, govt affairs execs — dominated by anticipation of US Sup Ct decision in Tenn case (originally called Byrd, now on name 3 as defendant-regulator has changed). But, no dice, no decision, yet.  Could be as early as Thursday, or next week...

In any case, veteran alc bev atty Richard Blau encapsulated his annual, remarkably comprehensive review of current state of alc bev litigation across the land.  How comprehensive?  How about over 200 cases split across 20 separate categories?  Richard’s theme this year: “Why Regulation Still Matters.”  Sheltering minors, discouraging irresponsible/excessive consumption, tax collection, assuring product safety and promoting orderly licensing/mkts remain critical, indisputable “dictates” linked to alc bev regulation, Richard asserts.  But not all regulation and regulatory activity remains “relevant” in super-charged, fast-changing environment.  So, regulators and industry alike need to weigh relevance of long-held tenets and traditions.  Indeed, Tenn case, along with all the others INSIGHTS has covered over this last 12 mos, and many more, specifically test

relevance of: residency laws, ad restrictions (vs 1^st Amendment), state lines (retailers seek to cross ’em), pricing regs (Total Wine challenges), 3-tier system itself and more. 

Join the Revolution, Vet the Mktg  Beyond his astute analysis of the cases, Richard was asked for his thoughts about how to ensure current regulatory system remains relevant going forward. Since communications/data access now “most important enablers of society,” Richard observed, state agencies need to “update” their websites to provide more info to consumers and industry alike.  Many are woefully behind, even in getting info online in the first place, much less making it easily accessible, searchable, etc.  Data about licenses, agency declaratory statements/rulings/guidance should be readily available.  Along same line, some states still actually dealing with paper checks for licensing, not EFT.  So: “join the electronic revolution.”

As far as industry goes, too often members will take “seek forgiveness rather than permission” approach, especially when it comes to new, creative mktg strategies. But, vetting ideas with state regulators in advance a better approach, he believes.  Industry members should be able to explain why idea is legal; agencies should be able to explain why it’s not and help figure out necessary tweaks to get clearance.  “That’s a healthy relationship,” in Richard’s view, and allows that member to “educate” the regulator, rather than leaving that job to a competitor who may bring a complaint.     

Whither the Middle Tier?  Lastly, what about future of 3-tier system, specifically the middle tier?  Distribs rightfully believe, in Richard’s view, that “they bring such value, that many would still be in business” regardless of challenges to 3 tier.  But environment “changing so rapidly,” Richard points out, and the mktg, transport, safety assurance and other services wholesalers provide won’t be deemed as necessary down the road.  Indeed, he “fears” that “next generation” won’t view these roles as “needed” and US system will go more in direction of China, India, Russia and even EU where lack of middle tier has led to numerous instances of contaminated, adulterated and counterfeit product, problems US does not have in large part due to 3-tier system and specifically, the middle tier.  How’s that for “relevant?”