USA: Legal marijuana could make 2018 another rough year for MillerCoors' light lagers

For years, sales of domestic light beer—once the undisputed king of American booze—have tanked as imbibers turn to craft brews, wine and spirits. Now an even bigger threat looms: the growing reality of legal, readily available and socially condoned marijuana, Crain’s Chicago Business reported on January 5.

Recreational pot took another step forward Jan. 1, when California—the first state to legalize medical marijuana more than two decades ago—began allowing cannabis retail sales. That doesn't bode well for Anheuser-Busch InBev or MillerCoors, which has pledged to revitalize Coors Light and Miller Lite this year and next. One industry expert says the beer industry stands to lose 7.1 percent of its overall sales, or more than $2 billion, as the rest of the country gets on board with legalization.

"There's a ton of overlap in marijuana and domestic beer consumption among younger college males," says Rick Maturo, co-founder of Cannabiz Consumer Group, an Inverness-based research company. "This is the group that drinks beer at a heavier volume and is most likely to cut back if cannabis is legally available."

He says 27 percent of beer drinkers say they've already substituted marijuana for beer or would do so if the drug were legalized in their state. Other research predicts an even worse dip: Alcoholic beverage sales fell 15 percent after the passage of medical marijuana laws in a number of states, according to researchers at the University of Connecticut and Georgia State University.

Wall Street concurs. "There's clear evidence that access to legal cannabis softens alcohol revenue," says Vivien Azer, an analyst at equity research firm Cowen. "It's a combined problem: Wine and spirits have been gaining share for almost a decade, and Mexican (beers) have really taken off." Paired with marijuana's growing accessibility, this landscape means MillerCoors' light lagers will see another rough year in 2018.

Sales of Coors Light and Miller Lite were down 3.6 percent and 1.6 percent, respectively, through the third quarter from a year earlier, according to Nielsen data from Beer Marketer's Insights. In October, Molson Coors, MillerCoors' Denver-based parent, said its U.S. beer sales dropped nearly 3 percent in the previous quarter. And between 2010 and 2016, the light category as a whole saw volumes decline by 14 percent.

What's worse: The decline of Miller Lite and Coors Light is nearly impossible to offset through other sales—even as the brewer's Leinenkugel's and Blue Moon brands post robust results—because the two light beers represent more than half of MillerCoors' overall sales volume. They're "a major driver of our profitability," CEO Gavin Hattersley acknowledged on MillerCoors' third-quarter earnings call recently.

The Chicago-based brewer believes it can get to growth by 2019 via a strategy that includes launching new products. The company recently announced two, a light beer with fruit flavors called Two Hats and an alcoholic iced tea-lemonade drink called Arnold Palmer Spiked, in an effort to capture millennial drinkers. Last year it also bought the U.S. import rights to Sol, a Mexican beer previously distributed by Heineken. The move gave MillerCoors a late but much-needed presence in the Mexican import business, which has been growing by double digits for several years.

Still, pot remains a formidable threat. Colorado, which legalized recreational marijuana in 2012, collected cannabis tax revenue of $227 million from August 2016 to July 2017, nearly double that of the same period in 2014-15, according to Cannabiz's Maturo. Tax revenue for beer, wine and spirits over the same period was just $45 million. (Part of that difference, it should be noted, comes from the fact that marijuana is taxed at a higher rate than alcohol.) In Washington, cannabis has driven 91 percent of tax revenue growth from 2015 to today, he adds, noting that marijuana growth in California is likely to be even more explosive.

Cowen's Azer says MillerCoors is unlikely to see even flat volumes of its light beers this year, as Massachusetts follows California into legalized recreational marijuana. A slew of other states may also do so in 2018, despite U.S. Attorney General Jeff Sessions declaring war on cannabis on Jan. 4.

If MillerCoors can't beat marijuana, it may join it. In November, Constellation Brands, an international alcohol producer whose beer business is based in Chicago, bought a 10 percent stake in Canadian medical marijuana company Canopy Growth to co-develop THC-infused beverages.

Molson Coors executives are now acknowledging they may follow after years of skittishness. In a November earnings call, CEO Mark Hunter said the company is "looking at potential impacts and/or the opportunities associated with" marijuana. "And we're developing a range of responses."

"A lot of alcohol companies are taking a serious look at the space," says Brett Cooper, an analyst at Consumer Edge Research in New York. He says that at a recent industry conference, "every single executive speech referenced the issue of marijuana's cannibalization of alcohol sales. It's not a fringe issue anymore."

Beer and pot need not be mutually exclusive, analysts say, though it's currently illegal for establishments to sell both alcohol and pot. "Cannabis can really be a complementary and supplementary option to beer, especially among people who indulge in a social capacity," Maturo says. One easy way to combine the two is through tinctures, cannabis-infused liquid extracts that can be added to beer at home or in bars. His company is working with two large beer manufacturers he declines to name to assess the marijuana market.

"In 10 years, you'll be drinking cannabis drinks at bars," says Chicago serial entrepreneur Pete Kadens, who in 2015 stepped away from his solar business, SoCore Energy, to found Green Thumb Industries, a medical cannabis business. "You'll see more and more companies getting on board."

E-malt.com, the global information source for the brewing and malting industry professionals. The bi-weekly E-malt.com Newsletters feature latest industry news, statistics in graphs and tables, world barley and malt prices, and other relevant information. Click here to get full access to E-malt.com. If you are a Castle Malting client, you can get free access to E-malt.com website and publications. Contact us for more information at marketing@castlemalting.com .