CANNABIS + ADULT BEVERAGE AN IN-DEPTH INTERVIEW WITH BERT MILLER + VERN DAVIS

Tom Adams, managing director of BDS Analytics, a company that tracks the cannabis industry, was recently quoted by Aaron Smith in an article for CNN Money reporting that the legal marijuana in the United States brought in around $9 billion in 2017. He also “estimates that national marijuana sales will rise to $11 billion in 2018, and to $21 billion in 2021.” Ultimately, cannabis is a business and business is good.

The cannabis industry is booming with very little data indicating deceleration. The advantages for consumers are evident and constantly in the spotlight, but I still have questions about the enterprise in its entirety. What is the existing industry climate? How will the industry progress functionally? Is there an infrastructure already in place to support the emerging industry and its rapid growth? Will other industries be affected? What potential does this industry have to cannibalize other industries? Logistically, what problems will all of these industries face? There are so many questions.

In order to get a bona fide gauge of the current relationships between the industries and what the future looks like for “cannabusiness” I sat down with our resident industry experts, Bert Miller, CEO of Protis Global and Vern Davis, Partner + Sr. VP of Business Development, to have a candid conversation and discussion on their impressions and forecasts.

 

WHAT ARE THE BIGGEST SIMILARITIES WITH THE TWO INDUSTRIES AS THEY STAND NOW?

VERN: There are definite similarities. Both businesses start with an agricultural product. The route to market is shaping up to be similar which makes me believe the infrastructure will be similar as well. The whole route to market piece is going to allow the cannabis industry to train itself on how to get a legally controlled substance to the masses, and that is going to be a big deal for the industry.

 

WHAT WAS THE PERCEPTION OF THE CANNABIS INDUSTRY IN THE PAST VS HOW IT IS NOW?

VERN: I think people’s eyes are opening. I think folks who have been consumers of cannabis have always thought that cannabis is a substance that is better for you than many prescription medicines and non-habit forming. There are some real benefits to cannabis. What I think is happening now is that folks who were not exposed previously to that knowledge or insight have more access to that information and are gathering their own information and debunking myths. I also feel like existing users are doing more reading and are actively trying to understand more of the natural wellness benefits of the products.

BERT: So, what you’re saying is that the information is taking away the taboo so to speak so people are actually open to learning the facts instead of just spitting out stereotypes.

VERN: I think taboo is a good word. It is absolutely opening people’s minds and they are learning that this is not some kind of voodoo drug. This is something that’s very natural and has legitimate proven benefits.

 

WHAT ARE THE MAJOR ENTRY BARRIERS FOR THE CANNABIS INDUSTRY AND HOW TO DO THEY IMPACT THE ADULT BEVERAGE INDUSTRY?

VERN: When we think of the current barriers of entry in the cannabis industry we can correlate them directly to the adult beverage industry during prohibition. The federal government has declared the substance to be illegal which created a huge illegal market. States have claimed the decision process and many have allowed the substance to be decriminalized or legal for medical and recreational use; however, the support from the banking system is a major missing piece to the puzzle. The federal government gives access to a banking system and this does not exist yet for the cannabis industry.  Over time there will be a race to get the federal government to approve this as a controlled substance or there will have to be an alternative system set up that will allow folks to ensure the money they have tied to cannabis commerce. That’s important because once that happens, it will likely remove some of the taboo that is put on the cannabis industry.

 

ACCORDING TO SEATTLE WEEKLY, “IN COLORADO, BEER SALES DROPPED BY MORE THAN 6% FOR YOUNG MEN 18 TO 25, AND WASHINGTON CANNABIS SALES OUTPACE LIQUOR SALES.” (ALSO, DATA SHOWS MILLENNIALS ARE DRINKING LESS CURRENTLY.) DO YOU THINK THIS DROP IN ALCOHOL SALES HAS MORE TO DO WITH THAT OR IS IT RELATED TO THE CANNABIS INDUSTRY?

VERN: Well, let me just start by saying that millennials most likely will not be choosing both. Consumer trends have indicated that millennials will choose either cannabis or alcohol in a particular situation. There are going to be occasions in which they will want one or the other versus more frequent use of both products. When we start looking at the state-level over time, where cannabis is a legalized controlled substance, we will find that it will have some effects on the adult beverage industry, but I’m not sure anyone can say definitively what that is. Also, I think similarities in the two industries will promote the existence of both businesses at the same time.

 

EX-BUDWEISER EXECUTIVE CHRIS BURGGRAEVE TOLD BLOOMBERG LAST MONTH:  “THIS IS ONE OF THE FASTEST-GROWING CATEGORIES GLOBALLY… BECAUSE PEOPLE WANT IT. WHEN CONSUMERS WANT SOMETHING, YOU IGNORE IT AT YOUR PERIL.” DO YOU THINK THE CANNABIS INDUSTRY IS EXPERIENCING A JOLT IN SALES BECAUSE IT IS RELATIVELY NEW? WILL IT EXPERIENCE A DROP DUE TO MILLENNIAL CONSUMPTION SOON ENOUGH?

VERN: You have to remember that the black-market cannabis business has trained consumers to use cannabis products over time. The industry is attracting new consumers in as well as legitimizing older consumers. I think there is an allowance out there for the industry to grow. This will be an ongoing trend that I think will continue for a while.

BERT: Well now, I was reading Forbes and in the next 10 years BDS Analytics is saying that recreational marijuana will account for 67% of the industry and medical marijuana sales will only hold about 33% of the market. I don’t think the growth in sales and consumption is slowing down any time soon. I mean even outside the U.S. the market is booming. The new number is $57 billion. They’re predicting that the cannabis industry worldwide is going to be worth $57 billion by 2027 and that’s not too far away.

 

ACCORDING TO NEWSWEEK, “CANADIANS SPEND ABOUT AS MUCH MONEY ON CANNABIS AS THEY DO ON WINE. STATISTICS CANADA, A FEDERAL STATISTICS AGENCY, FOUND THAT CANADIANS CONSUMED $4.8 BILLION WORTH OF WEED IN 2015, PUTTING THE INDUSTRY ON PAR WITH THE WINE INDUSTRY, WHICH CANADIANS SPEND ABOUT $5.4 BILLION ON.” WHAT HAS BEEN THE BIGGEST INFLUENCE ON THE CANNABIS INDUSTRY THAT HAS CAUSED IT TO SNOWBALL THE WAY IT HAS? A SHIFT IN PUBLIC PERCEPTION OR THE LEGAL SHIFT?

VERN: I do believe that the consumer acceptance of the product has been a key driver to the cannabis industry being accepted as an enterprise and it has been given a runway to expand to countries like Australia and Canada.

BERT: You mentioned Canada but you can even go outside Canada. This is not just unique to Canada. Let’s look at Aspen, Colorado. So on a smaller scale, Aspen sold more cannabis than liquor stores at $11.3 million in 2017 vs $10.5 million in liquor stores. It’s outselling liquor stores in Aspen. So we have this perfect storm that’s all converging together at the same time and part of the convergence is dealing with governance and legislation. The train has basically left the building so governance and legislation are now trying to figure out how to deal with it. You have more and more restrictions being lifted by various states. So you have the governance situation. You also have citizenship and the social acceptance of weed. It is far greater than it was. There are more educated people that understand that the health benefits of adult beverages are negligible. So you have people getting sick and dying from alcoholism and addiction but then you have a natural organic product that now is altering people’s perceptions. We have empirical data that it is actually a medicinal product and a wellness product. Now you have social, governance, and wellness. There are probably 3 or 4 other things I could give you but if I had to pick 3, those are the 3 pieces that are impacting the acceleration with what’s happening in cannabis.

 

“CANADA’S WEED LEGALIZATION WILL GO INTO EFFECT IN JULY 2018, AT WHICH POINT THE MARKET COULD BRING IN $310 MILLION, BLOOMBERG REPORTED. MOST PROVINCES SET THE AGE AT 19 AND ALLOW USERS TO HAVE ABOUT 1 OUNCE (30 TO 40 JOINTS) IN THEIR POSSESSION.” NOW THAT CANNABIS IS LEGALIZED IN MANY PLACES, THERE ARE A LOT MORE RULES AND REGULATIONS THAT OBVIOUSLY DON’T EXIST IN THE “BLACK MARKET.” DO YOU BELIEVE THESE REGULATIONS ARE ENOUGH? LIKE ALCOHOL, THERE IS AN AGE LIMIT AND A LEGAL LIMIT ETC. ARE THE RULES FOR CANNABIS CORRECT?

VERN:  We definitely need regulations. Well don’t forget that age and amount of purchase or intake are consumption regulations. The folks that are investing in the cannabis space and actually have businesses in the cannabis space want those regulations. They really want regulation because they want to eliminate the black market. They want to legitimize this industry to the point where it’s more like the adult beverage industry. Regulations on the manufacturing and distribution side are crucial. There is a standard dosage of THC and how a product is packaged is really critical and important. The advantage that the legal market has over the black market is that investing in the legal market is likely investing in a functional food product and a functional beverage product so that means they are really investing in their infrastructure to make sure that if you get a cookie you know how much THC (actual active ingredients) is actually in that whole cookie and you know what a serving size looks like and you can actually create, by design, very positive experiences with a controlled substance.

BERT: If you look at other controlled substances, like alcoholic beverages in the United States, each state has their own alcoholic beverage commission that regulates the business- whether you sell cold beer on Sundays or not, where you can sell spirits, and things of that nature. The one thing that seems to be pretty consistent across the united states for the most part is age and in some states the amount you can purchase at any time. I think it’s fair. I really do. I think we have to put some restrictions on it because it is a wellness product and a medicinal product.

 

LIKE YOU SAID, THERE HAS TO BE REGULATIONS. THERE IS JUST NO WAY FOR THIS TO BE ANYTHING THAT THIS NEEDS TO BE IF THERE AREN’T REGULATIONS. DO YOU THINK THEY ARE DOING ENOUGH? ARE AGE AND AMOUNT RESTRICTIONS ENOUGH? DO YOU THINK PEOPLE SHOULD HAVE TO PASS A TEST OR GET SOMETHING SIMILAR TO A DRIVER’S LICENSE TO HAVE THIS?

BERT: I think parents should have a say so up to 18 when people can legally make their own decisions. In terms of the amount I think we have to limit the amount. I’m saying this from this standpoint: hypothetically, somebody could go in buy a large amount of marijuana and essentially create their own black market. We have to ensure that this is not an option.

To further that discussion around legislation, there has to be some controls over being under the influence and running machinery, driving, and that type of thing. The difficult piece there, and I know they’re working on it though I don’t know what it’s called, is the technology to determine how to measure the influence of cannabis or hemp even (any psychoactive wellness, medicinal, recreational weed). The next question around the technology being, what is the right measurement? We have .08 generally across the country as the measurement of illegality for alcohol. What is the measurement for cannabis?  That’s something we are going to have to deal with, absolutely. The technology is going to be such as to measure a number/a piece due to the different strains of weed. People are going to respond differently to different strains as they do to different adult beverages.  Similar to the variations in adult beverage. For example, whiskey is typically 80 proof or higher and a beer is around 4.5-9% on average which is about 9-18% alcohol. You can drink up to 3 or 4 beers to one whiskey of same volume.

 

DOES THE COMPOSITION OF THE MARIJUANA ITSELF AFFECT HOW IT SHOULD BE REGULATED? FOR INSTANCE, INDICA VS SATIVA. ARGUABLY WITH ALCOHOL, YEAH THERE ARE DIFFERENT ALCOHOLS AND THEY HAVE DIFFERENT STRENGTHS, BUT ESSENTIALLY THE EFFECTS ARE THE SAME, RIGHT? A DRUNK IS A DRUNK AND PEOPLE DON’T ASK WHAT ALCOHOL THEY GOT DRUNK ON. WITH WEED, WHAT TYPE OF CANNABIS SOMEONE IS SMOKING GENUINELY IMPACTS THE EFFECTS WHETHER THE STRAIN IS HIGHER IN IDICA OR SATIVA OR CBD. IS THAT A FACTOR YOU FEEL NEEDS TO BE ADDRESSED?

BERT: That’s a damn good question. I don’t know.  I believe there has to be a technology that measures the actual point of influence that a person is under to operate a vehicle. You know if someone wants to be stoned and sit in the corner that’s cool but you cannot have a semi-driver out killing an entire joint on his own or eating 3 dosed brownies and driving the freeway.

 

I GUESS THE 2 FACTORS ARE: ONE, CAN IT BE MEASURED AT ALL IF SOMEONE HAS OR HAS NOT SMOKED IN A YES OR NO FORMAT AND TWO IF SO, IN WHAT TIME FRAME DID THEY CONSUME OR INTAKE?

BERT: There could be something for diabetes where you measure for blood sugar. Maybe something like that is being worked on. My point is: how would that go across and how would that be approved. There may be a technology that can take your breath. Like a weed breathalyzer of sorts. There has to be something. Right now, in theory, there is “under the influence.” If they determine you’re under the influence you can be arrested not for driving drunk or driving high. You would be charged simply with driving under the influence. I think it’s too broad right now but I think they’ll have to figure it out as more and more states switch over.

 

DO YOU THINK THAT THE BLACK MARKET CAN ACTUALLY BE ELIMINATED?

VERN: No, and I say that not pessimistically just realistically. I think it can shrink because the black market is bigger than the legal market. That can reverse. It can continue to shrink to a very controllable size.

BERT: Yeah, my answer is no too.

 

ACCORDING TO SEATTLE WEEKLY, “IN NEVADA AND CALIFORNIA, LIQUOR COMPANIES HAVE INSERTED THEMSELVES INTO LEGALIZATION EFFORTS. WHEN VOTERS LEGALIZED WEED IN NEVADA EARLIER THIS YEAR, THEY ALSO APPROVED A MEASURE GIVING EXCLUSIVE LICENSING POWER TO TRANSPORT AND DISTRIBUTE WEED TO ALCOHOL WHOLESALERS FOR THE FIRST 18 MONTHS.” CANNABIS SALES DID NOT REACH FULL POTENTIAL BECAUSE NOT ENOUGH ALCOHOL WHOLESALERS HAVE GOTTEN THEIR DISTRIBUTION LICENSES. WAS THIS A CORRECT STRATEGY? IN YOUR OPINION, WHAT IS THE SMARTEST STRATEGY FOR THE ALCOHOL INDUSTRY AT THIS POINT? DO THEY BUY INTO THE CANNABIS INDUSTRY OR DO THEY COMPETE WITH ALCOHOL?

VERN: I think what happened in Vegas was a situation where the lobbyists for adult beverage companies wanted to get some exclusivity to this new market and control it to really get a chance to understand it and not allow it to impact what their core business was immediately. Even though there was a dip in sales initially I think what you’ll see is that the adult beverage business be early adapters to this and they will be a driver to the growth and not diminish the growth. I think what you’re going to see is the alcohol industry is going to embrace this because you already see large adult beverage companies like Constellations making huge investments in cannabis like they did in Canopy Growth a couple of months ago. There is an acceptance because at the end of the day everybody that I talk to which owns a cannabis company, wants to sell it to big alcohol, big pharma, or big tobacco so alcohol is going to embrace this.

 

WHAT ABOUT THE READY TO DRINK SPACE OR THE SNACK SPACE BECAUSE THERE ARE EVEN CANNABIS BEVERAGES NOW? DO YOU THINK THESE ARE MAJOR COMPETITORS TO THE ALCOHOL INDUSTRY OR THE ENTIRE EDIBLE INDUSTRY? DO THESE OTHER INDUSTRIES NEED TO BE WEARY OF CANNABIS’ GROWING POPULARITY?

VERN: I think ready to drink drinks, which are lower proofed adult beverages, and other functional beverages that are not adult beverages, CBD can play a role in that. THC will play a role in the adult beverage arena and they need to look out for that. I do believe that there are other industries that are going to be affected. Consumers can only do so much. Everybody is fighting for their share of your stomach. You’re not going to be doing everything at the same time.

 

I WAS GOING TO ASK YOU “WHAT OPPORTUNITIES IN THE CANNABIS INDUSTRY ARE THERE” BUT I THINK WE TOUCHED ON THAT.

VERN: What did you get out of that then?

BERT: Yeah, how would you sum that up?

So, I’m in the hot seat now? Ok, so I have gathered that the opportunities in the cannabis industry are endless, as cliché as that is to say. The cannabis industry as a whole is vast and the product and service offerings lie on a continuum per se. Opportunities such as creating a line of functional foods and beverages differ from the opportunities in the medical space. I believe wellness in general is going to be the central theme in regards to how a vast array of products are going to be positioned and marketed to consumers. I also think it’s interesting that you guys made the distinction between products and industries that will compete with THC-based products versus products and services and industries that will compete with CBD-based products and services. Most of these opportunities; however, are dependent on the federal government’s participation in infrastructure development and solidification so everything is basically still to be determined.

 

Vern and Bert’s knowledge of the cannabis space comes from research and years of exposure to “cannabusiness” dating back to when the industry was at an almost embryonic phase. Now that you all know a little bit of what we think about the cannabis industry, its market potential, and where it fits in our current and future economy, we would love to know what you think! Send us your thoughts, forecast, or any follow up questions you would like us to address.

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