One niche of the cannabis sector that has been drawing increasing analyst scrutiny and investor interest is cannabis-infused beverages. Attention here has been soaring even further recently for several reasons.
- The second (and much larger) strategic investment by Constellation Brands Inc. in Canopy Growth Corp. (TSX: WEED, NYSE: CGC, Forum), as well as the very significant joint venture between HEXO Corp. (TSX: HEXO, OTCQB: HYYDF, Forum) and Molson Coors Canada
- Additional speculation on more beverage giants moving into this space, with this week’s report of a potential deal between Coca Cola Co. and Aurora Cannabis Inc. (TSX: ACB, OTCQB: ACBFF, Forum) being the biggest rumor/headline
- The imminent national recreational market for cannabis in Canada, and the one-year countdown until cannabis-infused products are scheduled to be legalized in Canada
- The (more uneven) progression toward cannabis legalization in the United States
The second Constellation Brands cannabis investment seems to be the trigger for a new cannabis rally, much like last year’s strategic investment in WEED is seen by many as the spark for last year’s end-of-the-year rally. Certainly, coming on the heels of HEXO’s deal with Molson Coors, these two big deals appear to have re-ignited investor sentiment.
Then there is this week’s earlier excitement: word that Coca Cola was in talks with Aurora Cannabis about a possible move of its own into cannabis infusion. Coca Cola immediately issued a denial that it had any interest in cannabis. A day later, Aurora released its own denial.
One person who would not have been surprised to see something happen here is Aaron Keay. The President of Keay Capital Group, cannabis investors may recognize this name as Keay has already worn a couple of hats in the cannabis space. He is the previous CEO of Vivo Cannabis Inc (formerly ABcann Global) and remains as a Director. Keay is also the new Chairman of The Alkaline Water Company (TSX: V.WTER, OTCQB: WTERE, Forum).
This puts Keay in the somewhat unique position of having looked at cannabis-infused beverages from both sides of this equation: as a senior executive for a cannabis company and (now) a beverage manufacturer.
In speaking with Stockhouse Editorial, Keay said it would be “natural” for a major beverage manufacturer like Coca Cola to be taking a hard look at the cannabis-infused beverage space. He sees this as an extension of the general industry dynamics of these beverage giants. As a new beverage niche opens up, the multinationals move in – and begin buying out key players.
This is why several of the largest Canadian-based companies have already been involved in major deals. However, Keay also noted that as an emerging sector, it wouldn’t necessarily be only the largest cannabis (infusion) companies who will be potential candidates as partners (or acquisitions) for the beverage giants.
Keay explained that as an emerging sector, branding in the cannabis space is still in its infancy. This narrows the advantage somewhat for larger cannabis companies as potential JV partners or acquisitions. WTER already had an established beverage platform: bottling alkaline-pH water for health-conscious consumers, available in 40,000+ retail locations. Infusing these beverages with CBD (cannabidiol) seems like a natural extension of the business model, given that research into CBD is uncovering more and more health benefits.
There is also nothing preventing a company like Alkaline Water from moving into THC-infused cannabis beverages and becoming a direct competitor for the alcoholic beverage companies as well as the health-and-wellness beverage space. Indeed, THC-infused cannabis beverages is precisely the market being targeted by Hill Street Beverage Company Inc. (TSX: V.BEER, OTCQB: HSEEF, Forum).
As its symbol implies, BEER is a beer and wine manufacturer. More specifically, Hill Street manufactures and distributes de-alcoholized beers and wines – award-winners in international competitions. BEER was already a healthy alternative to alcohol products. THC-infusion turns that company’s products into adult “recreational” beverages, with the capacity to claim much more market share.
Naturally, Hill Street is extremely enthusiastic about the potential for cannabis-infused beverages in Canada. BEER’s Chief Marketing Officer, David Pullara shared these thoughts. “Drinking is already one of our most social activities; you don't get together with your friends to smoke, but you do get together to drink. So when cannabis-infused beverages become available in Fall 2019, we fully expect them to quickly become the preferred way of enjoying cannabis.”
Of course, scale does have its advantages. HEXO Corp holds the distinction of executing the largest single supply agreement in the history of the cannabis industry, its $1+ billion deal with the province of Quebec. As a bona fide industry leader, it’s not surprising that HEXO was a leading candidate when Molson Coors Canada went shopping for a Canadian partner for the cannabis-infused beverage space.
When asked if he saw cannabis-infused beverages as the future of the cannabis industry, HEXO’s CEO Sébastien St-Louis responded with a qualified “yes”. St-Louis sees cannabis-infused beverages as the single largest component of the cannabis industry (approaching 30%) – but as a part of a much, much larger overall sector.
That’s the picture in Canada with respect to cannabis-infused beverages, but investors certainly can’t forget about the United States. Even with the uneven, state-by-state process for cannabis normalization in the U.S., the U.S. represents a much larger marketplace for the medicinal cannabis market and already has a larger population base than Canada with respect to the recreational market.
Holding back both U.S. and Canadian-based companies, has been two things: difficulty in raising capital and an uncertain and restrictive regulatory structure. Aaron Keay notes that one of these factors has already ceased to be a significant impediment and the other may be about to become much less of an issue.
While U.S. financial institutions originally wouldn’t even consider supporting funding of the cannabis industry, these are bankers. As the number of dollars in play in the cannabis space grew exponentially, these stodgy institutions finally reached the conclusion that they couldn’t afford to remain on the sidelines.
Meanwhile, a final vote is approaching for national legislation to legalize hemp in the United States. If approved, this legislation would instantly open up a national U.S. market for hemp-based cannabis products – which would include CBD-infused beverages. Hemp is considered to be an even richer source of cannabidiol than the marijuana sub-species of cannabis.
Such legislation wouldn’t have a direct/immediate impact on the THC-infused beverage market. But it would be much easier for U.S.-based cannabis corporations with (now) national reach in the hemp market to much more effectively target the individual state markets where THC-infused beverages are already legal.
Is the cannabis-infused beverage space the future of the cannabis industry? Most observers would suggest that it is still too early to form a definitive conclusion here. What can be said with certainty is that there are already a lot of corporate dollars (and energy) being focused on this sub-sector of the cannabis industry – on both sides of the border.
For investors, this means that cannabis-infusion is an investment angle that requires very serious consideration. A number of the companies associated with these products have already started to run and investors have several different ways in which they can play this space. As the New Cannabis Rally unfolds, many shareholders are already raising a toast for cannabis-infused beverages.
FULL DISCLOSURE: HEXO Corp. and Hill Street Beverage Company are paid clients of Stockhouse Publishing.