Cannabis Beats Booze, Says New Report from TD Cowen

Move over booze, your customers would rather have cannabis instead.

A new report from TD Cowen analyst Vivien Azer said legal cannabis is driving consumers away from alcohol. The long time cannabis equity analyst wrote: “Alcohol sales in legal cannabis states have underperformed by 100-150 bps over the past five years. With $29 billion in sales in 2023E, we expect U.S. cannabis sales to grow at a 7% CAGR over the next 5 years, as the category is set to gain 18 million past-month users (while alcohol could lose 2 million users).”

Since Colorado legalized retail sales for adult-use cannabis, the market has grown to 11% of alcohol sales, which is up from only 4% five years ago. Azer’s team believes that over the next 5 years, that growth trend will continue for the cannabis category, while alcohol will decline as consumers embrace cannabis and cut back on their alcohol consumption.

It seems beer is taking the biggest hit as the percentage of past-month cannabis users who prefer beer has fallen 6 points over the past three years, according to TD Cowen’s proprietary survey.

Sticking With It

Alcohol may have hoped that cannabis consumers would eventually return to them after the novelty of legal cannabis wore off, but that doesn’t seem to be the case. TD Cowen wrote that among 18-25 year-olds this past month, cannabis category retention has grown roughly 1,000 bps, to 68%, while past month alcohol category retention has fallen about 400 bps to 74% in 2022.

Azer said her survey showed that two-thirds of cannabis consumers said they cut back on drinking.

“According to BEA data, states with access to legal cannabis are underperforming by over 100 bps, while select Nielsen states show a roughly 140 bps delta. Meanwhile, the 5-year alcohol volume CAGR for adult-use cannabis states has underperformed non-cannabis states by 150 bps in IWSR (data),” the report said.

Growth

TD Cowen noted that, historically, the alcohol category in the U.S. has grown at a 5% CAGR. However, younger consumers are opting to go sober for longer. Azer projects that could present a 100 bps headwind to industry volumes over time.

As the stigma around cannabis weakens, she expects cannabis sales to grow 11% in 2023 and alcohol to grow 3% in 2023.

Looking ahead, more adult use states are coming online, such as Connecticut, Maryland, Missouri, and New York, as well as pending transitions in Minnesota and Ohio. TD Cowen now estimates total U.S. legal cannabis retail sales of $29 billion in 2023 and $37 billion in 2027.

As cannabis consumers drink less, they report consuming cannabis on a more frequent basis. The analysis cited data from the National Survey on Drug Use and Health highlighting that more than 47% of past-month consumers use cannabis on a daily or near-daily basis (20-30 days/month).

“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,” Azer wrote.

Stock Conclusions

When it comes to stocks, Azer thinks that alcohol can manage the effect of cannabis sales in the near term. Beer will eventually be affected, but companies with exposure to more popular categories, such as tequila and bourbon, stand to do better.

Azer also noted that soda consumption is declining and energy drinks are facing more scrutiny, which could provide additional opportunities for growth in other areas.

She remains positive on cannabis but noted that more work and change needs to occur before the industry will reach its full potential.