Alcohol Prohibition Can Teach Us a Lot about the Eventual End of the Cannabis Black Market
It may not be the perfect comparison, but there are some striking similarities between the end of alcohol prohibition and the slow crawl to cannabis legalization nationally. Both industries were stymied by state legislatures that were hesitant to respond to changing circumstances, and both faced a similar challenge: how to sell to a new generation of consumers?
Legalizing cannabis was supposed to create a well-organized marketplace where consumers could easily buy products that they knew were safe and high-quality, and states could collect new tax revenues to fund their governments. However, the illegal market for cannabis continues to thrive, which hampers everyone’s plans. The legal market is struggling to attract buyers because its product is more expensive and is similar in quality to many black market alternatives.
So, what went wrong? In a word, price. Legal prices — driven up by taxes — have been a factor helping to keep the black market running. The taxes are also a big reason why new testing and packaging requirements remain unstandardized, and expenses are prohibitively high for people trying to open cannabis businesses. Consider, California imposes a 15% excise tax on all cannabis sales in addition to local taxes that, when added up, can put more than a 45% markup on legal cannabis products. California’s illicit cannabis market is worth an estimated $3.7 billion, more than four times the size of the state’s legal market.
How do you fix it?
The solution to eliminating black market cannabis isn’t clear cut. Will it require more enforcement, oversight, and regulation? I don’t think so. Those will only burden legal cannabis businesses, and allow the black market to thrive even more. The end of prohibition had a similar impact on alcohol. The end of prohibition didn’t end moonshiners, and the cannabis industry can learn a lot from the alcohol industry post-prohibition when it comes to how to beat the black market competitors.
There were five factors that turned the tide from alcohol’s black market to the legal market.
- Convenience and accessibility
- Quality and consistency
- Brand trust
- Expanding the customer base
- Innovative products
It’s very hard to draw loyal consumers away from a black market to a legal one when there is no brand identity among the consumer groups. The legal cannabis market cannot win on price, nor should it try. But it’s important to remember that consumers are willing to pay more for brands they trust that can also provide an experience they can’t easily find on the black market.
Simply put, the most successful brands after prohibition didn’t market to customers drinking moonshine. By focusing on luxury products and lifestyle marketing, they expanded their consumer base to introduce alcohol’s appeal to new demographics.
What does Anheuser-Busch have in common with cannabis?
How did those post-prohibition alcohol brands get their product in new customers’ hands? One word: branding. Fortunately for cannabis companies, they can easily absorb these branding lessons. They don’t have to reinvent the wheel; they can adapt it.
When alcohol became legal, large companies like Anheuser-Busch and Coors were able to dominate the market and ultimately become household brand names. You’ve probably heard of Budweiser even if you don’t drink. There are three growth-related reasons why that happened: integration, innovation, and marketing.
- Integration: Anheuser-Busch began to refrigerate beer during transport. Investments in rail car and railway companies followed, and now the company has a global distribution network for its beer brands.
- Innovation: Anheuser-Busch was the first American brewer to pasteurize beer to keep it fresh, and Coors was the first American brewer to package beer in aluminum cans. They also used sterile filtration techniques. These changes promoted significant brand and sales growth.
- Marketing: Anheuser-Busch relied heavily on marketing campaigns to aid growth. One of its most successful campaigns happened in the late 19th century and featured lithograph prints of Custer’s Last Fight, a painting that depicted Lieutenant Colonel George Custer during the Battle of the Little Bighorn. The prints were posted in thousands of bars, and the painting became one of the most popular paintings of the time. They also sold a lot of beer.
Cannabis companies will have to be equally clever if they plan to beat their black market competitors. Marketing, innovation, integration, branding, these strategies can help cannabis companies realize their potential.
Why is regulation important?
After the end of alcohol prohibition, the federal government began regulating the alcohol industry heavily. This was a hard lesson learned, in part, from the public safety hazards black market alcohol consumption caused. These regulations could be a guide for cannabis companies on what may come during this new era of prohibition.
On the black market, no one tests the quality of cannabis products. There are no best practice cultivation processes. But the solution to help consumers avoid potential danger isn’t rooted in government regulations.
Consider the prohibition era. The DEA and the ATF didn’t end the illegal distribution of moonshine. They didn’t exist. The black market failed because the legal market created brands that customers could trust. Brands that endure today that still deliver consistent products and experiences. Cannabis must do the same.
Among other things, the Federal Bureau of Alcohol, Tobacco, and Firearms, or the ATF, as well as individual state bureaus, have created laws regulating the manufacture and sale of alcohol. This vigilant oversight has led to a decrease in illnesses and deaths related to consumption of tainted alcohol, and it should serve as a model to improve the safety of legalized cannabis moving forward. Likewise, regulatory oversight of the cannabis industry would improve consumer awareness and promote accuracy in the manufacturing, labeling, certifications, and other features native to cannabis products.
Mark Twain is often attributed with the quote, “History doesn’t repeat itself, but it often rhymes.” No two industries will ever be the same, but cannabis companies can learn a lesson or two from the alcohol industry and apply that knowledge to succeed. When looking at the future of the cannabis industry, we have a strong conviction that cannabis will be federally legalized in the US. We believe it will eventually replicate the success of the post-prohibition alcohol industry and the eventual end of the black market.
We just hope it won’t take as long.
