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What Prohibition Can Teach Us About Marijuana Investing

Posted by Alex Conde August 24, 2018 • 4 min read

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  • How popular marijuana legalization has become as an investing topic, and the growing number of investment choices
  • Why some alcohol companies survived prohibition, while others did not
  • How we can look back to the legalization of alcohol as a potential model for how the marijuana sector might grow

1923 was the year the hammer came down on Cannabis and it was introduced to the Narcotics Drug Act Amendment Bill by The Government of Canada. The subsequent 94 years have been dubbed an “abject failure” as the government begins tabling legislation to legalize marijuana use for Canadian adults. This would make Canada the first G7 country to fully legalize national marijuana use.

The pending legalization has led to an explosion of excitement in the investing community. The number of marijuana-related companies listed on exchanges is growing—both on the TSX itself as well as the TSX Venture Exchange.

While the potential for profit is there, the question remains…will that potential be realized? To get an idea of the impact of legalizing marijuana, we can look back at the lessons from an era glorified in movies—the time of Prohibition. The decade where alcohol was outlawed, and the subsequent legalization led to a number of very interesting things in the alcohol industry.

So let’s take a look back at a time of rum runners, speak-easies, and gangsters like Al Capone.

Prohibition and alcohol

While Canada did have a brief period where alcohol was outlawed, the far more famous Prohibition occurred in the United States. A time that has since been immortalized for the underworld culture that Prohibition was partially responsible for creating.

From 1920 to 1933, the U.S. Prohibition forbid the production, importation, transportation, and sale of alcoholic beverages. In 1916, four years before Prohibition came into effect, there were 1,300 breweries in the United States. Ten years later, there were no companies “officially” producing beer. A handful of breweries had prepared themselves and transitioned into other industries. For example, the Coors Brewing Company began making near beer (a non-alcoholic beer-like beverage), porcelain products, and malted milk. The porcelain making arm of Coors grew from their bottle-making efforts, and still exists as CoorsTek. Anheuser-Busch took a similar route, producing a non-alcoholic beverage called Bevo, ice cream, soft drinks, and truck bodies. Pabst Blue Ribbon made cheese instead of beer.

While some companies survived through innovative means, the alcohol industry as a whole was devastated.

Wineries went from 318 in 1914 to 27 in 1925. The number of distilleries fell by 85%, wholesalers decreased by 96%, and legal alcohol retailers fell by 90%. Innovative companies that redeployed their resources to create other products, were able to weather these kinds of storms and set themselves up for expansion once Prohibition came to an end, but inflexible companies didn’t survive.

The alcohol landscape after Prohibition

One of the immediate impacts of ending Prohibition was an increase in the legal sales of alcohol. However, the increase wasn’t as big as you might think. Overall alcohol sales didn’t bounce back to pre-prohibition peaks until the early 1970s.

It is also worth noting that Prohibition still continues in some parts of the United States. There are 10 states that contain counties where the sale of alcohol is prohibited. While we think of the end of Prohibition as being a smooth transition, it was far from it. For the rest of the 1930s, there was a real risk of Prohibition being reinstated, and the entire state of Mississippi remained alcohol free until 1966, 33 years after the federal law against alcohol was repealed.

More recently, while craft breweries are increasingly popular they are still only a minority of the overall beer sales. Looking at the United States, in 2015 there were more than 4,800 breweries (an all-time record high number of permits were issued in 2016). There are definitely a lot of available choices, but approximately 90% of the beer sold in the U.S. in 2014 came from only nine companies, Anheuser-Busch, Pabst, and MillerCoors among them.

What does this mean for marijuana?

A study by Deloitte found that the legal recreational marijuana industry in Canada could be $22.6 billion in size when marijuana users, growers, tourists, license fees, and all other elements of the legalized industry are taken into account. That’s a massive potential market, and just like in the aftermath of Prohibition, there are few companies positioned to handle the demand (or at least licensed to do so).

A study by Deloitte found that the legal recreational marijuana industry in Canada could be $22.6 billion in size

However, in the proposed legalization legislation, the federal government will be leaving the retail model for how marijuana will be sold to the provinces, meaning there are still some unanswered questions, such as: what the specific sales regulations will be, can you brand/advertise marijuana products, necessary health warnings, taxation rates, and more.

There are several important lessons that apply from the ending of Prohibition:

  • The law isn’t changed yet, so we don’t know how the landscape will look
  • The size of the market does not necessarily mean a profit for individual companies involved
  • Some companies might prosper, a far greater number will not
  • Just because it is legalized in 2018, doesn’t mean there won’t be restrictions slapped back on in the future

Looking at beer companies, clear winners have emerged over time. With approximately 90% of the beer market in both Canada and the U.S. controlled by larger breweries, if you were an early investor in one of those companies you might have prospered. However, with thousands of breweries and only a few stand-out successes, your odds of choosing a winner right from the start are far from guaranteed.

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