Marijuana investors are bubbling over with excitement, and who can blame them as this once-taboo industry ramps up production and rolls out the red carpet for consumers.
Last year, Canada wound up ending nine decades of recreational marijuana prohibition and became the first industrialized country in the world to give the green light to adult-use weed. According to some estimates, this should allow the Canadian weed industry to grow sales to nearly $6 billion a year by 2022. Taking into account that two-thirds of all U.S. states have legalized pot in some capacity, and Mexico is getting ever closer to a broad-based legalization of weed, the North American market is looking very conducive to investment.
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Most alternative marijuana products aren't legal right now
However, the marijuana industry isn't nearly as cut and dried as you might think. It's about more than simply growing dried cannabis flower and selling it. In fact, if growers simply chose to focus on dried flower, they'd probably get creamed if the U.S. states of Colorado, Washington, and Oregon serve as an example. Over time, dried marijuana flower becomes an oversupplied and commoditized product, leading to a decline in per-gram pricing and reduced margins for those weed companies that lack portfolio diversity.
In order to combat this, growers need to think outside the box. The way they do this is by focusing on alternative cannabis product options, such as cannabidiol (CBD) oils, vapes, sublingual sprays, lotions and balms, edibles, and cannabis-infused beverages. These are significantly higher-priced and higher-margin products than traditional dried flower, and they're far less susceptible to future pricing pressure relative to dried cannabis.
But there's just one problem: Most of these alternative products aren't legal -- even in Canada. When the Cannabis Act was passed by Parliament, dried flower, sublingual sprays, and cannabis oil were given the green light, while edibles and infused beverages, arguably the two most attractive means for retailers to drive foot traffic and lure in first-time consumers, have remained illicit. Thankfully for growers and investors, this is soon to change.
Recently, Health Canada outlined its game plan on alternative consumption options. The goal, per the regulatory agency, is to have all alternative cannabis products, with the exception of infused beverages containing alcohol, approved for sale by no later than Oct. 17, 2019, which would mark the one-year anniversary of recreational weed going on sale in Canada. As such, brand-name beverage companies and their cannabis partners are preparing for launch.
Beverage makers and pot stocks are bubbling with anticipation
The expected release of cannabis-infused beverages can't come a moment too soon for Molson Coors Brewing (NYSE: TAP), which became the first major beverage producer to announce a joint venture or partnership with a pot grower last year. The joint venture between Molson Coors and HEXO (NYSEMKT: HEXO), known as Truss, is expected to begin putting nonalcoholic cannabis-infused beverages on retailers' shelves by this fall.
Last week, Molson Coors reported its fiscal fourth-quarter and full-year earnings, and they demonstrated just how badly a spark is needed for this company. Sales in the U.S. and Canada, which have traditionally been its bread-and-butter markets, fell 7% and 5%, respectively, on a constant-currency basis during the fourth quarter. The company's market share of the beer market in Canada has, in particular, been falling precipitously for about a decade. With the exception of the company's limited but growing premium beer offerings, its major beer brands have really been a drag. And as icing on the cake, tax accounting errors forced it to restate its full-year 2016 and 2017 results.
Being able to work with HEXO to put a premium product in front of consumers, and having 57.5% ownership in the Truss joint venture, with HEXO owning the remainder, puts Molson Coors in the driver's seat to reap the rewards of an expanded beverage portfolio.
Then again, Molson Coors won't be alone. In December, Tilray and Anheuser-Busch InBev (NYSE: BUD) announced that they'd be contributing $50 million each to a collective $100 million joint venture to research and develop nonalcoholic cannabis-infused beverages in Canada. More specifically, Tilray will be working with Anheuser-Busch InBev's wholly owned Labatt Brewing subsidiary to create new beverages. The joint venture, which was announced in December, was a complete about-face for Anheuser-Busch InBev, whose CEO, Carlos Brito, had no intention of entering or entertaining the cannabis space as recently as this past June.
Constellation Brands (NYSE: STZ) and Canopy Growth (NYSE: CGC) are also in the infused-beverage picture. In November, Constellation, which produces the Corona and Modelo beer brands, closed on a $4 billion equity investment in Canopy, giving it a 37% stake in the company. It was actually the third time Constellation had invested in Canopy. Aside from betting big on the entire cannabis movement, Constellation expects the two will work together to create a line of infused-cannabis beverages.
The big question
What remains to be seen is if cannabis-infused beverages will actually be needle movers for any of the companies involved.
For a smaller company like HEXO, which is still in the relatively early stages of ramping up production capacity and aiming for its 108,000 kilograms in peak annual output, a 42.5% share of infused beverage sales come the fourth quarter of the existing calendar year could be quite nice. With just over 75 million Canadian dollars in sales expected in fiscal 2019, infused beverage sales as a percentage of total sales will likely be higher at HEXO than at any other company.
As for Molson Coors Brewing, this is a company that regularly generates close to $11 billion in annual sales. Although it might be the first beverage maker to have really dipped its toes into the pond, it won't be the last. Competition is building, and there are no guarantees that it will provide much of a lift to the company's sliding Canadian sales. Mind you, I'm not faulting Molson Coors one iota for moving into the cannabis space, which is a smart maneuver from a growth perspective. But expecting infused beverages to be a panacea for its North American sales slide is probably being far too optimistic.
One way or another, we'll know whether this hype is justified before the year is over.
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Sean Williams has no position in any of the stocks mentioned. The Motley Fool owns shares of Molson Coors Brewing. The Motley Fool recommends Anheuser-Busch InBev NV, Constellation Brands, and HEXO. The Motley Fool has a disclosure policy.