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By September 18, 2018 0 Comments Read More →

Federal Cannabis Legalization the Next Challenge for Wine

By Marc Hauser, Esq. Gaw Van Male, LLP

Expert Editorial

As another harvest season is underway in Wine Country, the industry faces a new wave of disruption. Not sparkling rose in 40-ounce cans, but another recreational product – cannabis. Cannabis is on the minds of winemakers and winery owners these days as states continue to legalize and money pours into the industry. Needless to say, the wine industry has taken notice.

As you’ve likely heard, cannabis is now (September 2018) legal for recreational use in nine states (plus DC), and for medical purposes in thirty-one states (plus DC). As you’ve also likely heard, cannabis remains a Schedule I drug under the Controlled Substances Act, making it still illegal under Federal law. This unusual and unprecedented disconnect between Federal and state law has made for many odd results, one important result for the wine business being that large, multinational companies and institutional investors won’t directly invest in the cannabis industry in the US (also known as “touching the plant”) and compete with alcohol. Yet.

However, this doesn’t mean that the large money isn’t getting ready. Just look up to our neighbors to the north, where cannabis has been made legal nationwide. The result has been large, well-publicized investments by Constellation Brands (which was financed by Goldman Sachs and Bank of America Merrill Lynch) and Molson Coors in Canadian cannabis companies, and Canadian cannabis distribution partnerships with Southern Glazer and Breakthru Beverage. This is in addition to the public steps that have already been taken in the US – craft brewer Lagunitas, owned by Heineken International, has developed a THC-infused, non-alcoholic IPA. Flowhub’s point-of-sale technology for cannabis retailers is powered by a partnership with Hewlett-Packard.

The stigma is gone, and now it’s just a matter of preparation and positioning. All of this capital is developing relationships and strategy, creating brands, and getting a stake in the ground, waiting for the real prize – Federal legalization in the US. Once that happens, the large players will dive into the US industry to quickly gain market share with their lower cost of capital, scale, and marketing expertise. Why? Because whether it’s true or not that cannabis is a threat to alcohol and tobacco use (the signs are sort of pointing to possibly, but it’s still too early to tell), companies have figured out there’s money to be made, so why lose out?

Add to the mix the quick growth of media-savvy cannabis companies targeting a wide range of potential customers. These companies aren’t just going after slacker stoners (though, to be fair, that’s still a segment of the market) – they’re creating products aimed at well-heeled baby boomers who are using cannabis for the first time, senior citizens seeking the potential palliative effects of CBD, and millennials who view this as a lifestyle product. Cannabis now comes in different THC strengths for different effects, and products are at all price points, with luxury, niche offerings in the market. In other words, the cannabis industry is going straight for the same customer base as the wine and spirits industry. Is there a threat to the $250 bottle of Napa cabernet? Probably not. Is there a threat to the $10 bottle of California pinot grigio? More likely.

With the large alcoholic beverage companies and distributors already getting ready, and the cannabis market already gunning for market share, where does that leave the wine industry?

The answer, unfortunately, is, well, who knows? So much is dependent upon if and when cannabis is legalized by the Federal government, as well as if the Federal government heightens enforcement. In the meantime, relationships are already being built and strategies are already being developed, and there is ample opportunity for the wine industry to do the same. The threat could be ignored, similar to how the record industry ignored, and then fought, and then lost (badly) to, online streaming. Or the threat could be understood, embraced, and planned for.

There’s an opportunity in all of the inefficiency and uncertainty of the current US cannabis market. The question is whether the wine industry will take up the challenge.

The foregoing is the opinion of the author and does not express the views or opinions of Gaw Van Male LLP. The foregoing does not constitute legal advice, and cannot and should not be relied upon. Cannabis is illegal to possess, use, distribute, and/or sell under Federal law, and this commentary is not intended to provide any guidance or assistance in violating Federal law.

Marc HauserExpert Editorial

By Marc Hauser, Partner at Gaw Van Male, LLP
Marc Hauser is a Partner with Gaw Van Male, LLP, a boutique business and estate planning law firm in Napa, CA.  Marc leads the firm’s cannabis transactions practice, with a focus on M&A and capital markets, in addition to advising the firm’s wine industry and other clients.  He last spoke on the topic of cannabis and wine at the Wine & Weed North Coast Symposium in August 2018.

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