Strange Brew: Big Alcohol Enters the Cannabis Market
It has been widely reported that Constellation Brands has acquired a 9.9% interest in Canopy Growth Corp., a Canadian vendor of marijuana products. This is the first foray by a major supplier of alcohol beverages in this area. The interesting question is whether this deal signals the potential interest by the alcohol beverage industry in the burgeoning marijuana business in the United States.
Seven states (Alaska, California, Colorado, Massachusetts, Nevada, Oregon, and Washington) have already approved the sale, distribution, and use of marijuana. In addition, the District of Columbia permits residents to use marijuana, but the product cannot be sold in the District. Maine’s legislature had passed a bill approving recreational marijuana, but the Governor vetoed it, and the House of Representatives recently upheld his veto.
The alcohol beverage industry is well positioned to invest in the marijuana business from both a distribution and regulatory perspective. The industry has had a very effective system of distribution in the United States since the repeal of Prohibition. Wine and beer are sold in most markets in the United States by producers and importers to independently owned and operated distributors. Likewise, producers and importers sell distilled spirits to independently owned and operated distributors in 33 states and the District of Columbia. These distributors have in-state warehouses to store products and sales people to solicit orders from restaurants, taverns, liquor stores, and grocery stores. The remaining 17 states have a “Control” system in place where the State itself is the wholesaler and often the retailer (for off-premise consumption) of the distilled spirits.
The industry is also highly regulated. Distributors are licensed by both the Federal Government and the various State Alcohol Beverage Control Boards. In the Control States, the vendor itself is the State so by definition, the state agency is in the business of wholesaling and sometimes retailing the product. Since the industry is already highly regulated, it seems logical that if recreational marijuana becomes legal in more states, the existing State Alcohol Beverage Boards could be asked to regulate marijuana as well. The State of Washington followed this model when recreational marijuana became legal in that state. The Washington State Liquor Control Board transitioned to the Washington State Liquor and Cannabis Board and has regulatory responsibility for both alcohol beverages and marijuana.
Constellation Brand’s expansion of its business in Canada to marijuana products may suggest that it is only a matter of time before Constellation or some other major producer or importer may segue into the marijuana business in the United States.
Arent Fox's Alcohol Beverage and Cannabis groups will continue to monitor developments in this area. If you have any questions, please contact Michael Kelly, James Ravitz, or the Arent Fox professional who usually handles your matters.