Cannabis Musings - March 27, 2023

Friends – long-time readers of these Cannabis Musings will remember that we’ve been talking about the intersection between wine and cannabis for years. Although those early Musings (since 2018!) are lost to the ether, I’ve been kvetching that the two industries should find ways to work together (even if they’re currently limited due to federal law) in anticipation of eventual legalization. Large alcohol companies have the infrastructure, know-how, and capital to build brands and execute. Small alcohol companies capture the enthusiasts who care about the craft, the people, and the aesthetic (see, e.g., Pabst Labs). It’s not perfect, but to me, it makes a lot of sense.

Relatedly, I’ve been saying for years that the big legalization lobbying fight will be over distribution. Specifically, I think the alcohol distribution companies will push hard for federal law to require distribution of cannabis similar to how alcohol is required to be sold interstate through a three-tier system. Heck, I even kinda wrote about this back in 2019 for Bloomberg Law (which was also one of my early missives about interstate commerce).

This is for good reason from their perspective – in short, the three-tier distribution system requires that alcohol be sold wholesale through a federally-licensed distribution company, rather than directly to the retailer (with some exceptions). Similar to alcohol producers, the alcohol distributors have the equipment, infrastructure, capital, and logistics know-how and experience to also distribute cannabis (once it’s legal, of course).

Indeed, we’ve seen some US alcohol distribution companies dip their big toes into cannabis – consider Johnson Brothers’ circuitous investments into Humble & Fume in 2021 and 2022; and Southern Glazer’s 2021 agreement to distribute Canopy’s CBD beverages in the U.S. What keeps them from diving in fully is the same thing that keeps other highly-regulated industries (alcohol, tobacco, financial services) from playing directly in the space – cannabis is still illegal (but they’re getting ready). (Full disclosure: when I was a practicing lawyer, I advised cannabis, alcohol, and alcohol distribution companies on all of this, but I don’t currently have any such representations.)

Fast forward to last week, when the Wine & Spirits Wholesalers of America, the alcohol distribution trade association, issued a paper outlining its “Principles for Comprehensive Federal Regulation and Oversight” of U.S. adult-use cannabis. Among other things, this position paper recommends a federal licensing system for cannabis operators that imposes a three-tier distribution system just like what’s required in alcohol (and in some ways, even more restrictive):

May a producer sell cannabis to a consumer? A producer can sell cannabis to a consumer in the state in which the cannabis is manufactured if permitted by state law. Sales and shipments from producers to consumers across state lines are not permitted.

What activities does a distributor FBP [the contemplated license] allow? A distributor FBP allows the holder to engage in the business of purchasing cannabis for resale (from an FBP producer or another FBP distributor) and receive, sell, offer or deliver for sale, contract to sell, or ship in interstate or foreign commerce, directly or indirectly or through an affiliate, the products purchased for resale.

The alcohol distribution industry has thrown down the gauntlet, and it’s very interesting to me that they’ve chosen now to do so. I was right in my prediction - this is going to be a major lobbying battle over the structure of the national cannabis marketplace, one that will be as profound a change as interstate commerce (if not more so), and this paper is merely the first salvo.

I’m not necessarily taking sides in this, but I’ve got the popcorn popping.

Be seeing you!

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© 2023 Marc Hauser and Hauser Advisory. None of the foregoing is legal, investment, or any other sort of advice, and it may not be relied upon in any manner, shape, or form. Subscribe to Cannabis Musings at hauseradvisory.com.