Bigger than Alcohol

This was first published in the Delta Dispatch, and we'll be discussing this topic at length at CannaDataCon.

Hemp beverages satisfy a growing need for today’s consumer. Per capita ethanol consumption has peaked in the U.S., yet consumers remain thirsty for an altered state of consciousness. A zero-sum game, this is not; hemp beverages already drive millions of incremental gross profit dollars for alcohol distributors who are otherwise feeling the pressure of a consumer that’s reducing their alcohol intake. Think "per capita cigarette volumes in the ‘60s" and you might be in the right ballpark:

Like its ancestor, THC flower, we see hemp beverage as its own iconoclastic consumer category, and it’s going from zero to one right in front of us. As our friends at Whitney Economics have suggested, the total market for cannabinoids is probably bigger than we can imagine [Note 1]. This market for cannabinoids has already forked in myriad ways; hemp beverages are just another branch of the tree.

Imagine how much ink has been spilled by folks trying to predict what the cannabis industry will look like when it’s “fully legal.” But what if there’s no need to pontificate? What if you’re already there? [Note 2]

Fact is, we already live in a bifurcated market for cannabinoids: mass distribution of lower-dose products and specialty retail for the enthusiasts. If you live in a “blue state” those specialty retail stores are called dispensaries. In a “red state,” they’re smoke shops or CBD stores [Note 3]. And unless you live in an “OG cannabis” state, odds are good that hemp beverages are coming to a liquor store near you.

As “traditional cannabis” operators debate whether to “get into” hemp, cannabinoid availability is skyrocketing for the end consumer [Note 4]. And no, we aren’t using the easy example of NYC bodegas. May we present, dear readers, Terminal A of the world’s busiest passenger airport:

In case the above photo is too blurry, that’s CBD+THC gummies (including 5mg of THC) being sold in a vending machine in Hartsfield-Jackson International Airport. Oh, and by the way, we were able to transact with a credit card!

As cannabinoid availability continues to explode, one could be forgiven for thinking that Congressional policy seems more like an afterthought. Think about it: do we have any evidence to suggest Congress, or the FDA, are capable of anything other than playing a game of perpetual catch up?

And let’s not forget that other branch: the Judiciary. Cannabis’ history of state-level regulation provides ample opportunities for case law to lurch further in the direction of states’ rights, a trend that’s accelerated following Trump’s historic judicial appointments during his administration. Yet at the same time, it’s reasonable to ask how this industry looks if the FDA were to suddenly decide to start taking a heavier hand in regulating an industry that’s de facto already under their purview.

Delta Emerald’s “Bigger Than Alcohol” series reveals the interconnected worlds of cannabis and beverages. First, we’ll explain how we got here, and then we’ll share where we’re headed. Going forward, we’ll provide periodic commentary on this “epic” similar to what we’ve done with cannabis data and technology. This will also be a key topic at CannaDataCon 2024 – let us know if you’d like to attend.

The “Bigger Than Alcohol” lineup is below. We’re excited to see where it goes from here:

1. Foundations First: The Three-Tier System of U.S. Beverage Alcohol Distribution
2. Velocity Versus Depletion: Contrasting Dynamics in Wine, Beer, and Liquor
3. Tapping into Tomorrow: The Pivotal Shift in Consumer Behavior
4. Overflowing Options: The Operational Maze of SKU Proliferation
5. Brewing Disruption: Navigating Shifting Sands in Beer Distribution
6. Cannabis Infusion: Lessons and Opportunities for Hemp Beverage Brands

Part 1. Foundations First: The Three-Tier System of U.S. Beverage Alcohol Distribution

TL;DR The three-tier system was implemented after Prohibition to separate alcohol producers, distributors, and retailers. As the country emerged from Prohibition, this was seen as an effective way to ensure tax collection. Today the ground is rapidly shifting beneath the three-tier system. Historically “fat and happy” beer distributors are facing major shifts in consumer preferences and competitive incursion from both ready-to-drink (“RTD”) liquor beverages and non-alcoholic beverages. Savvy distributors and high-traffic retailers are increasingly carrying hemp beverages. Notably, cannabis is not subject to the three-tier system and in fact, states like Florida have gone the opposite direction; requiring licensed cannabis operators to be fully vertical, and separate licensure entirely for retailers of hemp beverages.

Key Insights:

• Historical Context: Instituted after the end of Prohibition, the three-tier system was designed to eliminate bootlegging, administer taxes, and prevent monopolies by breweries over bars and retail outlets.Remember this is a ~100 year old idea, it’s unique to the U.S., and it exists as a patchwork of state-by-state regulations, many of which have religious foundations.As the CEO of a ~$30bn liquor distributor recounted to our team, “my grandpappy told me we aren’t in the liquor business, we're in the tax collection business.”
• Structure and Function: Treating producers, distributors, and retailers as distinct entities, the system aims to ensure fair competition and market access for various players.One consequence of this system was the formation of what are effectively geographical “mini monopolies” of beer, wine, and liquor distributors who distribute to “on premise” (bars, restaurants) and “off premise” (grocery, liquor stores).These “beverage rails” are private, family-owned businesses that have historically enjoyed strong pricing power.Across beer, wine, and liquor, beer distributors are the most fragmented, totaling about 3,000 in the U.S. compared to three major liquor distribution houses.
• State-Level Variability: The system is subject to state-specific regulations, leading to diverse implementations and complexities in navigating interstate commerce.
• Non-Alcohol Distribution: It’s important to note that the three-tier system only applies to alcohol. U.S. alcohol as a category is ~$300bn across on-premise and off-premise channels. Non-alcoholic beverages, including Coke and Pepsi products, are another ~$300bn and distributed on different rails.
• Impact on New Entrants: For emerging sectors like hemp beverages and cannabis-infused products, understanding and navigating this system is crucial for market entry and expansion.

In our next Dispatch we’ll dive into some key features of beer, wine, and liquor consumption. This will help us uncover just why hemp beverages can mean so much to alcohol distributors and retailers, even though cannabis beverages haven’t meant much to cannabis dispensaries thus far.

[Note 1] To wit, Whitney estimates a $28bn U.S. hemp market in 2022, making it roughly equal to legal cannabis. We admit, we didn’t have “hemp will be roughly as big as legal cannabis in 2023” on our bingo card.

[Note 2] Some believe that the Federal Government effectively legalized cannabis with the passing of the 2018 Farm Bill.

[Note 3] Walk into almost any smoke shop and ask them if they sell delta-8 flower, or THC-A flower. Odds are good they do.

[Note 4] Folks in cannabis (present company included) have a tendency to assume the average person knows way more about cannabis than they actually do. As cannabis products become more available, we can’t expect the consumer to meaningfully distinguish between delta-8 flower and fully regulated cannabis THC flower, for example.