Regardless of whether you are for or against legalization, adult adoption of cannabis has arrived at an inflection point with huge implications for the retail and CPG world. More than half of the U.S. adult population has consumed cannabis at some point in their lives and in the established recreational markets of Colorado, Washington, and Oregon, roughly one third of adults legally purchased cannabis during the past year. Perhaps most noteworthy is studies showing that nearly 100 million U.S. adults would consider using cannabis if it were legal. Current and potential consumers defy traditional stereotypes, transcending generations and socioeconomic status.
With recent legalization in California, Nevada, Massachusetts, and Maine, more than 1 in 5 U.S. adults now reside in a state where recreational use of cannabis is legal. This represents a 300% increase from 2016, and means more than 35 million adults can legally consume cannabis. In Colorado, there are more cannabis dispensaries than Subway and McDonald’s restaurants combined. In Washington, there are more dispensaries than 7-Elevens; and in California, there are more than 2,000 medicinal dispensaries preparing for the recreational marketplace to be established. In 2017, there are more than a dozen states considering legalizing recreational use of cannabis. The upshot here is that legal cannabis soon will become the largest new CPG category most of us in the industry have ever experienced.
This phenomenon is a threat and an opportunity to retailers when considering the basic needs consumers look to satisfy through consumption of cannabis:
- Social: to facilitate and enjoy interactions with others
- Experiential: to heighten experiences
- Medicinal: to manage pain and treat health conditions
- Holistic health: to reduce stress and promote personal wellness
- Habit breaking: to quell addictions or habits
These are some of the same need states satisfied by other categories such as beer, wine, spirits, sleep aids, internal analgesics, tobacco, smoking cessation, skin care, herbs, supplements, teas, energy drinks and prescription medications. These categories are mainstays of the grocery, drug, mass and convenience channels. Customers use these categories for social, experiential, medicinal, holistic health, and habit breaking purposes — the same reasons they use cannabis. In many instances, cannabis not only offers a viable alternative to a CPG product, but does so with perceived additional benefits to the consumer, such as lower cost or fewer side effects. Whether it’s reducing caloric intake by shifting some beer purchases to cannabis, or a desire to treat a muscle ache with a natural product as opposed to an OTC pain reliever, CPG categories are facing a new, formidable competitor as cannabis enters the category mix of customers.
It’s not just an assumption that cannabis will impact CPG sales, it is already happening. However, the impact often goes unnoticed since only four states currently have established legal marketplaces for recreational use representing just 5% of the US population. But the warning signs are clearly there. As new adult-use states and particularly California come online, the impact will become more apparent and more substantial. Because cannabis impacts brands disproportionately, some products will be highly impacted while others will experience much less of an effect.
The challenge for CPG retailers is that cannabis changes the product assortment paradigm since it cannot legally be sold by a CPG retailer. That means tried and true solutions like bringing in new SKU’s or reallocating space are not viable ways to handle customer shifts to cannabis. Further complicating matters: many impacted categories drive store visits so the impact of a shift is not only about the loss of a single category sale but rather the loss of an entire basket.
The situation is concerning, but retailers are incredibly resourceful and extremely resilient. They already have established DSD operations, currently sell highly regulated products, and are experts in marketing, assortment, merchandising, CRM, and cultivating positive customer shopping experiences. They also have an established footprint in the marketplace with significant visit frequency that can be leveraged to compete. Whether through investment or acquisition, driving change in regulations, or offering new complementary products, CPG retailers are extremely well positioned to adapt to the risks and opportunities presented by the cannabis industry’s expansion.
The near-term focus should be on gaining a better understanding of the evolving cannabis marketplace and familiarization with customer attitudes and behaviors toward cannabis use. Armed with this knowledge, retailers will be better equipped to formulate effective strategies regardless of the nature or speed of consumer adoption.