Legalized marijuana could dilute drinks sales

Recent passage of multiple marijuana initiatives, one of which approved in-restaurant cannabis consumption for Denver, might some day lead to a revenue windfall for operators. But near-term, we're going to find out whether pot-using patrons will continue to purchase alcoholic beverages as before. Some U.S. alcohol producers are worried they won't; eye-opening statistics from Washington State suggest those concerns could be real.  

At stake for operators: a decline in sales of high-margin items that are critical revenue generators. Restaurants make a bundle selling alcoholic beverages; they don’t make a dime when customers use pot.  

Denver's passage of first-of-its-kind Proposition 300 loosens the reins on pot lovers. It allows them to use marijuana — but not smoke it — in restaurants and bars. Vaping and edibles are OK; restaurants can designate outdoor areas for smokers in some circumstances.

However, the measure imposes onerous restrictions on restaurants that offer this amenity.  

Proposition 300's backers billed the measure as "the neighborhood-supported Cannabis Consumption Pilot Program. Before gaining a license that permits onsite marijuana use, operators have to demonstrate they have garnered formal support from an eligible neighborhood organization prior to applying with the Denver Department of Excise and Licenses." 

That's just the start. Then the real red tape kicks in. 

"The measure would require any interested bar or restaurant to specially train staff in marijuana use and submit an operations plan to show how it would prevent marijuana use by underage patrons. Applicants must also specify strategies and procedures for identifying and responding to the potential over-intoxication of consumers."

Which is to say, enforcement is the operator's job. Owners and managers will be in charge of figuring out whether a customer is too high and, if so, from what. Drunk patrons just get cut off. But shutting down guests who are using their own pot is going to be tricky. Who wants to be in charge of that? 

Not members of the Mile High Chapter of the Colorado Restaurant Association. They don't want any part of Proposition 300.

"The CRA Mile High Chapter voted to oppose Denver Initiated Ordinance 300 appearing on the City of Denver’s ballot. The initiative would allow for the public and dual consumption of marijuana and alcohol on a liquor-licensed premises. 

"The Chapter has concerns about the public safety impact of consuming marijuana and alcohol together as numerous studies have indicated that combining alcohol and marijuana intensifies the effects of THC and can result in dangerous and unpredictable behavior. They are also concerned about liquor liability insurance coverage.... Several insurance companies have already indicated to us that they will not insure restaurants and bars that allow marijuana consumption."

This stance presumes pot-consuming restaurant customers buy drinks in the first place. Statistics compiled by the Washington Liquor and Cannabis Board, while not restaurant-specific, show that marijuana sales there could soon eclipse those of spirits. The implication: More customers who want to catch a buzz may use marijuana, not alcohol, to do it.  

The trend is unmistakable. In the first quarter of 2016, Washington consumers spent $54.8 million more on alcoholic spirits than they did on marijuana. In the second quarter of 2016, the gap closed to $37 million, as marijuana sales rose above $200 million for the first time. Cannabis sales were $212 million in Q2, spirits sales were $249 million. Spirits sales numbers for the third quarter of 2016 won’t be available until early next year, but cannabis sales soared to $278.6 million, suggesting cannabis has achieved parity in a very short time.

These statistics track only distilled spirits, not beer and wine. A spokesman for the Distilled Spirits Council of the United States says spirit sales volume has not suffered since pot was legalized. But craft brewer Boston Beer sees trouble ahead. 

The Financial Times reports that the Sam Adams brewer warned in its regulatory filing last February that "'It is possible that legal marijuana usage could adversely impact the demand for the company’s products. We also believe that impacts the craft beer industry.'" Wall Street sees trouble ahead, too. Cowen and Co. senior analyst Vivien Azer underlines a worrisome trend.

"We are watchful of substitution with alcohol, as incidence among men in the US has fallen 0.1 percentage points in the last five years, while cannabis incidence has risen by 2.65 percentage points. With the legal market still in its infancy, we think the risk to alcoholic beverage consumption will become increasingly apparent," she says in a 110-page report. Beer and whiskey are the alcoholic beverage categories most prone to losing business, Azer says.  

It's very, very early in the legal marijuana game, and only a relative handful of entrepreneurs have figured out how to play it. Let's hope restaurants can develop a revenue-producing angle that lets them cash in. Keep an eye on Denver's pilot program to see whether allowing dining room consumption of cannabis products purchased elsewhere is one of them.