Cannabis legalization: The Alcohol Industry- Spectator or Participant?


Rick Garza, Executive Director, Washington State Liquor and Cannabis Board


Rebecca Stamey-White, Partner, Hinman & Carmichael LLP., San Francisco, CA

Rob Patridge, Government Transformation, Deloitte Consulting, LLP, Medford, OR

Mark Gorman, Senior V.P. for Govt. Relations, Distilled Spirits Council

Smoke Wallin, President, Vertica 



This panel was an interesting discussion on how the legalization of cannabis effects the alcohol market.

Rick Garza introduced the topic and mentioned how alcohol companies are making a foray into cannabis.

Cannabis has become a real threat to the liquor industry, and the liquor industry needs to figure out how to adjust to this new competitor.  It’s estimated that cannabis will be a $20 billion field by 2020.

So how does a beer company with slowing growth react to this?  The answer: companies like Constellation and MillerCoors have entered the field by acquisitions and joint ventures in the cannabis businesses.

What does this all mean? The alcohol industry is moving from a spectator to a participant in the cannabis industry!


Some interesting numbers

Rob Patridge provided a Deloitte report which detailed the cannabis impact on the market place. The report shows that legalized cannabis is causing an 8% decrease in beer and spirits sales and a 4% decrease in wine sales.

There are other interesting takeaways from this report. An important issue is how you deal with taxing and pricing. What is the price people will pay above the black market price? The report set that number at 10% above black market value. After that price point, the positive effects of legalization may suffer.

Based on the report’s findings, Rob talked about the room for growth in the cannabis market, which according to the study exist with conservative experimenters. Cannabis has even greater potential in the more mature markets, with more edibles becoming available, growth will increase. These trends could see the cannabis effect on alcohol moving north of 8% very soon!


A former liquor man in the cannabis space

Smoke Wallin introduced himself to the panel as President of Vertical which is a cannabis company that he built into a blend of Diaego and Southern. They are vertically integrated company and participate in the cultivation, manufacturing, and distribution space.

One interesting thing Smoke mentioned is because the market is so immature, they are forced into vertical integration. Smoke, who formerly owned a distillery, indicated that if he wanted to work with someone on a whiskey, he could give them the specifications and have the product he desired. With the present day cannabis industry that is so immature, this is impossible and you are required to do the work yourself.

As for game changers, he believes that once edibles come into the marketplace that cannabis sales will drastically increase and probably at the expense of beer and liquor. Another game changer is a future cannabis drink.


California story

Rebecca Stamey-White provided a nice introduction to the fledgling California cannabis scene. Although California legalized medical cannabis in 1996, it is still developing the legal structure for the nascent legalized recreational cannabis scene that began in 2015.

Previous to 2015 there were laws for doctors and patients, but no laws for infrastructure. There were no licenses, premises inspection, or taxation.

After the proposition legalizing cannabis passed, they merged the system that the legislature developed and the system that voters approved through Proposition.

She mentioned that California provides for local control for licenses and that any licensed facility needs state and local licensing.

Rebecca also mentioned the big crossover in the cannabis and alcohol space, and how the alcohol industry members want to get involved in the cannabis space.


The DISCUS view

DISCUS representative Mark Gorman provided his viewpoint on how a legalized cannabis system should operate and that there should be a 21 year old age use requirement and that retail sales should be heavily regulated. Taxes and the regulatory system should be comparable to distilled spirits.

Mr. Gorman questioned the effect cannabis is having on alcohol by stating that tax records show that cannabis is having no measurable impact on spirits sales.


The three-tier cannabis system and vertical integration

Smoke segwayed into an interesting discussion on how the middle tier will operate in the cannabis space. In California the middle tier is mandatory, whereas in Colorado there is no provision for the distributor tier. In California a manufacturer can operate in the distribution tier.

In Smoke’s view, the distribution tier will work better only if a distributor has multiple brands. The industry is still immature and we should see consolidation in the middle tier. It will be a small number of big distributors and a bunch of boutique distributors. In Colorado it is different in that the manufacturer sells directly to the retailer.

Rebecca mentioned an interesting point. In the current cannabis system unlike the alcohol field, the retailers and not the distributors hold the power.

Rob Patridge posed a very interesting question, will we see vertical integration in the new system. It depends on the politics of the state. California will provide the 1st opportunity to see how the cannabis industry shapes out on a large scale.

Presently, there is no regional or superpower distributor like in the alcohol industry.


The sticky and unknown government effect

A question was posed to Smoke, when will the feds pull the trigger and give legitimacy to the business? He believes politics are in favor of legitimacy with over 30 states having some form of legalization. The President and some conservatives are in favor of providing more leeway to let the states decide. It will be a lot like the 21st Amendment. State and local option will control where legalization occurs.

For conservatives, state control, veteran’s rights, and less harm than opioids are arguments that could win them over. Smoke believes Trump is listening and by 2020 will be for favorable treatment.

Gorman believes things will change when federal legislation comes. He believes that federal legislation and regulation will prohibit the cannabis industry from making health claims that it will make you happy and energized. In fact, the federal government will probably require cannabis companies to label their products with the harmful effects. So with federal legalization there may be negative marketing effects for cannabis.

Smoke indicated that some are failing in this industry and that 30% of cultivators and producers are failing their regulatory test. Although testing is expensive, he likes it because it provides legitimacy and it shows there is no salmonella, mold, or ammonia in their product. Testing should weed out, no pun intended, smaller and less prepared players.

Rebecca stated hemp legalization via the Farm Bill would occur first and this could be a big game changer towards legitimacy. If hemp legalization goes well, we are more likely to see medical and adult use legalized at the federal level.

Rob brought up an interesting point of how many government agencies will deal with cannabis, in small states there are about 7 state agencies, in large states the number is over 20, which begs the question, how many federal agencies will deal with cannabis?

The panel shifted to an interesting topic, how would the players in the industry get involved in the government’s decision making process? The big players will have a big part to play, but present day circumstances leave two very important questions open: 1) do big player want to be involved directly or indirectly; and 2) if they want to be involved, what is their government relations plan, how do they want to be involved?

Rebecca addressed the issue of involvement, because the stigma of cannabis, people are not engaging their local government officials and that has cost people. She stated that 90% of the growers have not even made it into the marketplace. The process is hard and painful.

Smoke was asked how does the tax code influence your business? He stated that it’s a cost of doing business, it effects the retailer more. The issue is the rules are new and everyone is trying to figure it out. Presently, a retailer has a 100% markup and the margins are 6%, that markup will not survive.

Smoke predicted that brands will emerge that matter from California. California has helped develop brands by allowing for a special event license which allows for branding. He provided as an example that California allowed him to setup a space at Coachella where his company could market and allow their product to be sampled.

Rebecca indicated that cannabis faces not only tax challenges but challenges on restrictions on technology platforms.

Rob made an interesting point that once cannabis goes recreational: how do you regulate cannabis and how is it classified? Rebecca indicated that if it is classified as a pharmaceutical, then it is health product, if regulated like alcohol, will we have the same marketing rules as alcohol?



A great panel of talented and intelligent people. In the end, even they don’t know which way the cannabis ship will turn. With an immature industry, there is much to figure out and a ways to go before we get there!