Dive Brief:

In the first full year of marijuana legalization, domestic beer volumes in Canada fell 3.9% compared to 2018, according to data from Beer Canada . That was partially offset by imported beer volumes, which grew 1.4%.

"This is far worse than the trends seen between 2014-2018, where beer industry volumes fell an average 0.3%," Cowen analyst Vivien Azer wrote in an analyst note sent to Food Dive.

The Canadian cannabis market overall is still small. Annual sales based on the most recent monthly data would be $1.5 billion Canadian dollars ($1.15 billion) compared to CA$9.2 billion ($7 billion) for beer and CA$23 billion ($17.6 billion) for alcohol, according to data from ​Beer Canada and Cowen.

Dive Insight:

At the end of 2018, Canada legalized recreational marijuana nationwide. In just over a year, the beer category is starting to feel the growing pains from the emerging cannabis industry in its consumption with the worst domestic beer decline in at least six years. These numbers may indicate what is to come for the industry in other countries that legalize the substance.

In Canada, this may be just the beginning of more bad news for the beer segment because the cannabis market is only starting. In December, the country began allowing some cannabis-infused products — edibles, beverages, topicals and extracts — to be sold in stores and more items are expected to hit shelves in the upcoming months. Azer said in the analyst note that Canada’s launch of these newly legal cannabis products could "perpetuate this trend" of declining beer volumes. She said she favors cannabis over mainstream beer as an investment as a result.

Canada's moves toward legalization could be a case study for U.S. Big Beer, which has faced struggles in recent years. U.S. beer volumes declined for five years straight leading up to the most recent data in 2018. But U.S. companies don't have as much to worry about yet since cannabis regulation is complicated.

The 2018 Farm Bill legalized hemp cultivation and an increasing number of states are making their own laws about cannabis legalization, but the substance is still in a regulatory gray area. The FDA held a public hearing last year to determine if there should be a pathway to market for the ingredient, but the agency recently told manufacturers that cannabis was not Generally Recognized as Safe for use in food.

Questions remain around how much of an impact marijuana legalization has on alcohol consumption. However, a survey from BDS Analytics found that more than 50% of people say they have paired cannabis with alcohol and when they do pair the two, half said they drink less. Declining sales and the pressure of the cannabis industry has pushed big alcohol and beer companies to head over to the bordering country to launch beverages with the ingredient.

Constellation Brands invested nearly $4 billion in cannabis company Canopy Growth, which just ​unveiled its Cannabis 2.0 portfolio of products, including cannabis chocolate products, distilled cannabis beverage products as well as vape pens and vape cartridges in Canada. AB InBev and Tilray announced the launch of Fluent Beverage Company, a joint venture between the companies that will commercialize and sell non-alcohol CBD-infused beverages in Canada. And Truss Beverage Co., a joint venture between Molson Coors Canada and cannabis producer Hexo Corp., is partnering with Flow Glow Beverages to make and distribute CBD-infused spring water in Canada. It is the first of six cannabis beverage brands within the Truss portfolio.

Although it could be years before the U.S. sees regulation on cannabis, U.S. companies looking to add cannabis to their portfolios and even those who don't will likely want to keep a close eye on the impact that legalization has in Canada.

"Cannabis is an emerging industry and is subject to regulatory headwinds," Azer wrote. "Looking forward, much work and change still needs to occur in order for this industry to realize its full potential."