Tinley’s Beverage Company: The Next Beverage Growth Story
Section 1: Cannabis Beverages: The New Frontier
Prohibition or not, people have been consuming cannabis for centuries. Smoking has been the overwhelmingly dominant method of consumption, via rolled joints, pipes, or a piece of cedar my friend Jeff and I hollowed out in my Grandpa’s woodshed. Little was accomplished by way of innovation. Sure, some of the savvier users may have created edibles, oils or tinctures at home, but these methods never reached the broader population.
In October of 2018, Canada was the first G7 country to legalize cannabis, ushering in a new era of publicly traded companies. Constellation Brands’ (NYSE: STZ) groundbreaking investment in Canopy Growth (NYSE: CGC) kicked off a flurry of M&A activity. Legitimate players entered the space, and with them came cannabis 2.0; a phrase used to describe value-added products like vaporizers, chocolate bars, and beverages.
Cannabis beverages are a healthy, smoke-free, smell-free, and discreet method of consumption. Typically dosed between 2mg-10mg of THC per serving, these micro-dosed products offer a similar experience to a serving of alcohol. Drink one for a buzz or several to get intoxicated. Users can have a good time without the hangover. They can also blend into a party or event instead of sneaking outside to smoke like a gremlin. This format is less intimidating to new users and offers a smooth transition for the growing number of people who are abstaining from alcohol. A recent study by Deloitte surveyed the Canadian market and found that 37% of adults intend to try cannabis infused beverages.
Cannabis beverages got off to a sluggish start, commanding just 1.9% of Canadian sales and 1-1.4% of sales in legal US states. This is due to several barriers including product quality, availability, regulations and pricing.
Cannabis beverage science is tricky, as cannabis oil does not dissolve in water, and must be infused using nano-emulsion technology. For this reason, it took some time for companies to release quality products. Product quality and availability have greatly improved, and have made beverages the fastest growing category in the sector. Hexo Corp (NYSE: HEXO) reported record sales in Q1, selling $3M (CDN) worth of beverages, a 54% qoq increase, representing more than 10% of their revenue. CEO Sebastien St. Louis commented: “This will be a highly fought-for category, it will be much more important to the industry than anyone realizes so far.” While speaking at a virtual investor’s conference, Tinley’s Beverage Company (OTC: TNYBF) CEO Jeff Maser presented a graphic showing beverages growing 4x faster than all other categories in California.
Oddly enough, the fastest growing category in the industry faces the strictest packaging, advertising and dosing restrictions. Perhaps most baffling are the purchase limits for consumers, as they can only buy 5 or 6 drinks at a time. This is due to a skewed measuring system that values beverages by volume more than their dosage. You can buy 30 grams of dry cannabis, enough capsules to put a horse to sleep, but you can’t walk out the door with a 6-pack of drinks. The Cannabis Beverage Producers Alliance was formed by several licensed producers to combat these issues, and they are optimistic that regulations will be adjusted to accommodate the category.
Price point is still an issue. Cannabis beverages currently cost roughly $5 per serving, more than twice the price of alcohol. With surging demand and more favorable regulations, prices should reduce significantly.
Think ahead 5 years into the future when cannabis is served in restaurants, lounges, festivals, casinos, airports, stadiums, and other venues. Lighting up a joint simply won’t be an option, and beverages will be the preferred method. On-site consumption is what will propel this category to new heights.
Molson Coors (NYSE: TAP) CEO predicts beverages will command up to 30% of the overall cannabis market. The following mainstream alcohol brands have entered the space in some capacity: Constellation Brands, Molson Coors, AbInBev (EBR: ABI), Heineken (AMS: HEIA), Pabst Blue Ribbon, Arizona Iced Tea and Moosehead. Big alcohol has identified cannabis beverages as the next trend, and with so many working towards a common goal, this becomes a self-fulfilling prophecy.
Today I would like to talk about a lesser-known company that is focused 100% on the beverage market. For those looking for exposure to this opportunity without the usual baggage associated with cannabis companies, please read further.
Section 2: Introduction to Tinley’s Beverage Company (OTC: TNYBF, CSE: TNY)
Tinley’s Beverage Company is a pure-play beverage company based in California. Founded in 2015, CEO Jeff Maser was a pioneer in the cannabis beverage space. His vision was to enjoy cannabis in the same format and in the same settings as alcohol. Tinley’s beverages are modelled after alcoholic beverages, with multi-serve liquor flavors (Whisky, Amaretto, Coffee Liqueur, Rum) and pre-mixed cocktails (Moscow Mule, Margarita, Paloma, Gin & Tonic). Maser and many on Tinley’s management team have connections to COTT (Now Primo Water Corp XTSE: PRMW), which was once the 3rd largest beverage company in the world. Maser also spent more than a decade as an investment banker.
Quietly, President Rick Gillis may boast the most impressive resume in the industry. He previously acted as President of Young’s Market Company, where he oversaw 3 billion in annual sales. Prior to this, he was the EVP/General Manager of Coca-Cola Company (NYSE: KO), Southwestern USA. In total, he has 30 years of experience in senior management positions of beverage and CPG industries. In December of 2018, Gillis joined Tinley as President of Tinley’s California, a position for which he is hilariously overqualified. (Check out the swinging ‘Rick’ on this guy).
NBA All-Star and entrepreneur Baron Davis sits on Tinley’s advisory board. The company hopes to tap into his extensive network of sports, hip-hop, and business connections. As an early investor in Vitamin Water, Baron is no stranger to the beverage game.
Despite starting the company more than 5 years ago, Tinley’s is still practically pre-revenue, highlighting the challenges in the industry. Using rented space and hand operated equipment, Tinley’s has soft-launched several small batches for testing purposes. California’s ruthless regulations prompted Tinley’s to change product names and labels several times. They even had a copyright discrepancy with Tetley Tea that ended amicably.
Through the trials and tribulations, the company worked diligently to get its ducks in a row. They met with more than a dozen beverage science firms before choosing Vertosa as their partner. They gathered feedback in the legal California market and tweaked formulations. They now have a premium, shelf-stable product with 15-minute onset time and 60-minute offset time. These products rival any in the industry, as evidenced by their 1st and 2nd place awards at the Emerald Cup, California’s most prestigious cannabis competition. Tinley’s 2020 Q1 financials reported 40% gross margins, this number is projected to improve with the recent commissioning of their permanent facility.
In November of 2020, Tinley’s announced the long anticipated final commissioning of their 20,000 square foot bottling facility in Long Beach. This serves as an inflection point for the company, allowing them to control their own production on a massive scale, and also act as a contract manufacturer to 3rd party brands. The facility is retrofitted with an automated, highly sophisticated bottling line that accommodates several different formulations, labels, and bottles. The facility has a capacity of 15 million bottles per year, with room to produce 15 million more when needed. The company also plans to install an aluminum canning line.
Tinley’s will generate revenue through 3 distinct revenue streams:
- Contract manufacturing: Tinley’s is in talks with twelve co-packing clients and plans to finalize these contracts in the coming weeks. This is an attractive option for brands who want to release a beverage without building the expensive infrastructure. For Tinley’s, this arrangement allows them to have a hand in an entire portfolio of beverage brands without the associated delivery and advertising costs.
- Tinley’s branded products: The first commercial batches of Tinley’s products have recently been produced and distributed to dispensaries throughout California. Tinley has tapped High Times delivery to distribute their online orders, Shelf Life Distribution to stock California dispensaries, and Great White North Distribution for the Canadian market, where they plan to launch in early 2021.
- Beckett’s non-infused products: The Beckett’s product line uses the exact same formulations as the Tinley’s product line, just without the THC. These products target the surging sober-curious category. This product line is interesting because it does not face the same restrictions as cannabis products, making nation-wide and international expansion a possibility. These drinks launched recently but have already gained impressive shelf placements, with entry into Costco, Ralph’s, BevMo and other locations in California. They’ve announced expansion to Texas and Louisiana, and recently started producing in Canada. These products provide an opportunity outside of cannabis, and should serve as a steady alternative revenue stream for the company.
At a recent capital investment conference, President Rick Gillis broke down his projections for the California market; The California cannabis market is currently worth approximately 4.5B, and Gillis believes beverages will command 10% (450M) of the industry within 2 years. Through Tinley’s branded products, along with their slew of co-packing clients, he believes Tinley’s can control 60% (270M) of the California beverage market. For a company currently valued at 41M, these numbers are staggering, and do not include the Canadian market or the non-infused product line. Cannabis beverages are among the highest margin products in the industry. Tinley’s highly automated, high-capacity bottling equipment will allow them to churn out bottles with very little overhead costs. These factors will allow Tinley’s to quickly turn a profit and scale their operations with ease. The company’s exposure to the US market will put them in a position to capitalize on the growing movement to legalize cannabis at the federal level.
Section 3: An Attractive Takeover Target
With renewed optimism in the cannabis industry, there is expected to be a flurry of M&A activity in 2021. Mainstream brands will want a piece of the burgeoning sector, but the question needs to be asked, what companies will be the most attractive targets?
There is nothing proprietary about growing or selling cannabis. Growing cannabis requires expensive greenhouse infrastructure and oversupply is already an issue. The cost per gram has already been squeezed, and is expected to move lower in the future. While this is a concern for licensed growers, it serves as an advantage for companies who are sourcing cannabis for their finished products.
Similar to the mainstream food and beverage industries, the best margins are in consumer-packaged goods. Alcohol companies don’t own barley farms, ketchup companies don’t own tomato farms, why would a company entering the cannabis industry care to own a cannabis farm? Companies entering the space would be wise to source their cannabis while focusing on CPG’s.
Tinley’s Beverage Company offers exposure to the fastest growing category in the industry without the typical baggage that accompanies cannabis producers. Not only does the company feature its own brand of products, but a whole portfolio of brands through their co-packing services. With strong management, no debt, a world-class facility, and a highly efficient business model, Tinley’s should be one of the juiciest takeover targets in the industry. Currently valued around 41M, this company has potential for 5-10x upside in the next two years, with the strong possibility of a buyout.
Disclosure: I am/we are long TNYBF.
Additional disclosure: All figures are in USD unless specified.