The legal cannabis industry is budding before our eyes, and in just over two months, it'll really take shape in our neighbor to the north.
Following the passage of the Cannabis Act by the House of Commons and the Senate in June, recreational marijuana is set to officially go on sale on Oct. 17. This legalization should result in billions of dollars flowing into the legal Canadian cannabis industry, and perhaps even validate investors' belief that pot stocks are the next greatest thing since sliced bread.
Alternative pot products come into focus
But what's often overlooked is that the marijuana industry is evolving. It's about far more than just dried cannabis these days. In fact, recreational marijuana legalization examples in Colorado, Washington, and Oregon, have all shown that oversupply and commoditization wreak havoc on dried flower pricing. This means growers are having to look at cannabis alternatives in order to ensure that their margins won't erode over time.
One of the more popular alternatives is cannabis oil. Though this is a niche product that'll primarily be targeted at medical marijuana patients, cannabis oil has far fewer pricing pressures attached to it when compared to dried cannabis. Growers such as CannTrust Holdings are expected to devote a significant portion of their production to oils as they expand.
Other cannabis alternative examples include concentrates, vaporized cartridges, edibles, and infused-beverages. It's worth pointing out that edibles and cannabis-infused beverages aren't going to be legal when the proverbial green flag waves on Oct. 17 in Canada. However, amendments written into the Cannabis Act allow Parliament to address the introduction of edibles and cannabis-infused beverages in the future. The expectation is that it'll be addressed, and legalized, in 2019.
It's this last cannabis alternative -- infused beverages -- that really has the alcohol industry intrigued.
The alcohol industry sets its sights on infused beverages
Let's face a harsh reality for the alcohol industry: Sales growth isn't what it used to be. Innovation has provided a spark from time to time for major alcohol producers, but it's been tough to move the needle in recent years.
Making matters even dicier, the legalization of marijuana throughout various parts of the world could actually coerce consumers to opt for cannabis products as opposed to alcohol. This represents a wake-up call for big alcohol companies to consider joining, rather than fighting, the legal cannabis movement.
Last October, Constellation Brands (NYSE:STZ), the producer of Corona beer and a host of other well-known spirits, became the first major alcohol company to buddy-up with the marijuana industry. Constellation wound up taking a 9.9% equity stake in Canopy Growth Corp. (NYSE:CGC) totaling approximately $190 million, and has since given itself a chance to expand that stake by acquiring more than $150 million in convertible debt from Canopy. The idea here is that Constellation Brands and Canopy will work together to create new products, including beverages, to reach markets where marijuana has been legalized.
More recently, Molson Coors Brewing Co. (NYSE:TAP) announced that it had settled on Hydropothecary Corporation (NYSE:HEXO) as its infused-beverage partner. Hydropothecary was an interesting choice for Molson Coors given that it may not even be a top-10 producer in terms of annual production when the ongoing round of capacity expansion for the industry is complete. Nevertheless, Hydropothecary's massive 200,000 kilogram supply deal with Quebec over a five-year period may have been enough to demonstrate to Molson Coors that Hydropothecary is ready for the main stage.
And make no mistake about it: Brewers like Molson Coors need a spark anywhere they can get it. Molson Coors' stock suffered through its worst single-day loss in 13 years after reporting its first-quarter operating results in May.
Say hello to the newest major player
Now, there's another major beer company angling for its piece of the cannabis-infused beverage pie: Heineken (OTC:HEINY).
On the surface, Heineken's global reach appears to be paying dividends. Consolidated global beer volume grew by 4.3% during the first quarter from the previous year, with its strongest growth seen in Asia Pacific (up 11.3%) and the Americas (up 6.8%). But hidden within this solid growth was a high single-digit decline in beer volume at Heineken USA. With cannabis flourishing in the U.S., even as the federal government holds firm on its Schedule I classification, Heineken sees an opportunity.
Roughly two weeks ago, on July 30, Heineken launched a cannabis-only beverage in a handful of dispensaries in California through its wholly owned Lagunitas craft-brewing brand. Designed to taste like beer, but containing no alcohol, Heineken hopes that its Hi-Fi Hops beverage catches on quickly with consumers.
Currently, the beverage comes in two forms – a 10 mg version with tetrahydrocannabinol (THC), the psychoactive component of the cannabis plant that gets a user "high," and a hybrid version with 5 mg of THC and 5 mg of cannabidiol, or CBD, the non-psychoactive component best known for its perceived medical benefits. As outlined by Business Insider, the drink isn't cheap at $8 per can. But they've also been flying off the shelves, per the report.
The thing to remember about cannabis-infused beverages
While it's become abundantly clear that infused beverages are the next-great thing within the marijuana industry, it's also important for investors to keep their expectations in check.
As noted, it could be a year or longer before Canada gives the green light to OK sales of edibles and infused beverages. Though that doesn't slow down the conceptualization of such products in our neighbor to the north, it does push out the timeline at which sales could become meaningful for alcohol giants like Molson Coors and Constellation Brands.
Additionally, it's unclear if the sales spark from infused beverage sales will be enough to really move the needle for these global giants. Whereas it could be a major sales boon for Canopy Growth and Hydropothecary, it's a lot tougher to move the needle when annual sales total tens of billions of dollars.
In other words, while it's really easy to get excited about the potential of big alcohol and marijuana stocks tying the knot, there's a lot to be hashed out with regard to product development, launch dates, and the meaningfulness of sales figures for large alcohol companies. Everything needs time to mature, and the cannabis-infused beverage revolution will be no different.