No one can predict what will happen in a crash, although, a crash is imminent. It may happen tomorrow, it may happen in 2019, or 10 years from now. While predictions should be taken with a grain of salt, a look back at history is valuable as history often repeats itself.
Alcohol Sales In 2008
The most recent high magnitude crash was in 2008, before the legal cannabis industry existed, making predictions around cannabis stocks for the next crash even more futile; however, we can look to the alcohol industry as a comparison.
One major variable worth noting is that the alcohol industry has a very small black market compared to cannabis. This will surely have some effect as the black market may be able to cut its prices much lower than the LP’s.
According to Sageworks, in 2008 alcohol sales expanded more than 9%, when the average unemployment rate was 5.8%. There was a slight dip in 2008, but in 2010, sales increased more than 9% while unemployment grew to 9.6%, showing a positive correlation between alcohol consumption and unemployment on a macro scale.
“These numbers grew almost in spite of the recession,” said Sageworks analyst Sam Zippin, noting health care was the only other industry to maintain growth through the recession. “Other than going to the doctor, alcohol is another need to have.”
Sageworks also found that other categories of the alcohol industry maintained growth throughout the recession, including retailers, wholesalers and bars. If we look to mirror the cannabis industry this could be: logistics, hardware manufacturers & tech, extraction and retail.
Wine and spirits experienced uninterrupted growth, as did the high-end craft beers. The loser appears to be the so-called “legacy beers,” including iconic brands such as Budweiser.
‘Everything nowadays is either hyper consumption, or extreme minimalism. Everything in the middle is fucked’ – Gary Vaynerchuk
The middle zone of any sector always feels the safest. It feels like the least amount of risk, turn on any episode of Kitchen Nightmares and one of the common problems businesses have is they exist in the middle. They play it safe and try to offer everyone everything as they believe this lowers the risk of customer dissatisfaction.
This does not work.
Rather, it leaves the business without a real identity and when you try to appeal to everyone, you really appeal to no one. This is why companies like: Wayland (WAYL), WeedMD (WMD), Emerald Health (EMH), Invictus (GENE), THC Biomed (THC) to name a few will probably falter as they are not the cheapest option, nor the fancy craft option.
Walmart and Grey Goose Win
Low cost producers like: Emblem (EMC) (now owned by Aelfia (ALEF), HEXO (HEXO) and Aurora (ACB) may have the upper hand as they can present themselves as the ‘The Walmart’ of cannabis, another company that did well during the recession.
Craft companies with excellent branding have a good shot at maintaining market share during a recession, but most of them are private, or owned by Canopy (CGC) who purchased Hiku earlier this year, the only properly branded lifestyle cannabis company. A couple others who have done well are: Choom (CHOOF) and Broken Coast, owned by Aphria (APHA).
For masters in lifestyle cannabis branding check out our interview with Trent Kitsch and Alan Gertner from Hiku from earlier this year:
INTERVIEW: HIKU, (DOJA + TOKYO SMOKE CEO’S EXPLAIN WHY THEY CREATED LIFESTYLE BRANDS IN THE CANNABIS SECTOR)
HEXO stands out as one company with great branding and often touts a below $0.89 per gram cost with hopes of selling premium product, whether or not the market responds to this is a mystery at this point, but that looks to be the winning formula if they can pull it off.
As much as we dislike MedMen(MMEN) and its operators, if they can get their finances right they also stand a chance as they have marketed themselves to the nth degree in key states like California, Nevada and New York.
“It appears that some of the mass-produced beers, Coors and Budweiser, are getting squeezed,” said Zippin. “[Consumers] are either going to really low cost beers, like PBR (Pabst Blue Ribbon), or they’re going to the craft beers.”
Coors Light, from Molson Coors Brewing, managed to carve out a sales gain of 1.1% in 2010, according to statistics from Standard & Poor’s and the industry publication Beer Marketer’s Insights. But sales for Miller High Life, also from Molson Coors, dropped more than 4% last year.
Sales for Budweiser, the flagship brand for Anheuser-Busch InBev Inc., plunged 7.3% in 2010, while Busch sales dropped more than 6%, Bud Light sales slipped nearly 2% and Natural Light fell 3%.
“The economy has been a major driver of declines within the industry,” said Dave Peacock, president of Anheuser-Busch, a subsidiary of Anheuser-Busch InBev (BUD). “The unemployment rate among core blue-collar beer drinkers remains three times that of more affluent, white-collar consumers.”
Peacock said his company “remains focused on things we can control” and that “we feel good about our marketing and the plans we have in place for our brand portfolio.”
But craft brewers have had a different experience. Sales at Boston Beer Co., () the maker of Samuel Adams and the market share leader in this category, edged up 1.7% in 2010, according to the S&P report.
Other craft brewers fared better as well, with Sierra Nevada Brewing Co. increasing its sales by 7.8%, Magic Hat Brewing Co. gaining 14.8% and New Belgium Brewing Co. soaring 18.3%.