It's been a stellar year of the North American cannabis industry. In October, Canada broke down a major barrier by becoming the first industrialized country worldwide to legalize recreational cannabis. In doing so, it brought legitimacy to a previously taboo industry and opened the door to an estimated $5 billion in added annual sales by the early part of the next decade.
In the U.S., two new states (Utah and Missouri) gave the green light to medical marijuana, upping the number of states to have legalized in some capacity to 32. Meanwhile, the U.S. Food and Drug Administration approved its very first cannabis-derived drug in June.
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Anheuser-Busch InBev dips its toes in the water
But what's arguably the biggest development in 2018, short of Canada legalizing adult-use weed, is the sheer number of partnerships between brand-name companies in the beverage, tobacco, and/or pharmaceutical industries and the marijuana industry. This past week, another two were announced, both of which were with Canadian-based Tilray (TLRY +0.00%), the first pot stock to IPO on a major U.S. exchange.
On Tuesday, Dec. 18, Tilray announced a distribution partnership with Sandoz, the generic drug arm of Novartis. Though not the first partnership between the two, it'll see Sandoz aiding Tilray in distributing non-combustible, non-smokable cannabis products throughout the world, where legal.
However, the bigger development, and the one that's been captivating the attention of investors for months, was the Wednesday, Dec. 19, after-market-close announcement that Anheuser-Busch InBev (BUD +1.73%) would be forming a joint venture with Tilray in Canada. According to the press release, Tilray and Anheuser-Busch InBev will each put up $50 million in order to research potential cannabis-infused beverages that contain tetrahydrocannabinol (THC) and/or cannabidiol (CBD) for the Canadian market. THC is the psychoactive cannabinoid responsible for getting a user high, whereas CBD is the cannabinoid best known for its perceived medical benefits.
More specifically, Tilray will be working with Labatt, an Anheuser-Busch InBev subsidiary, and, for the time being, this partnership will be confined just to Canada.
This is also an about-face for Anheuser-Busch whose CEO, Carlos Brito, told Just-Drinks.com in a June 2018 interview that:
Cannabis is something that we as a company are trying to learn more about. It's going to be regulated. It's going to be commercialized. But it's still a very restricted business and, in most places, it's not legal... We'll continue to follow it, but for now, we don't feel we need to do anything.
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Beverage deals aplenty in the cannabis space
While Wall Street appears excited about this newest partnership (Tilray's stock was up by a low double-digit percentage following word of the joint venture), it's far from the only beverage deal struck in the cannabis space in recent months.
On Aug. 1, Molson Coors Brewing Co. (TAP +0.95%) formed its own joint venture with Quebec-based HEXO (HYYDF +0.00%), with Molson Coors controlling 57.5% and HEXO 42.5%. Like the Anheuser-Busch InBev-Tilray deal, Molson Coors and HEXO will develop and market cannabis-infused beverages. Molson Coors has seen its share of Canadian beer sales shrink for about a decade, so it's looking for a way to reignite growth in the region. Meanwhile, HEXO is angling to make a name for itself. HEXO does have 108,000 kilograms of peak production potential, which may be good enough for a spot among the 10-largest growers in Canada. But it lacks brand-name differentiation, which it hopes Molson Coors will help bring to the table.
Two weeks later, on Aug. 15, Corona and Modelo beer maker Constellation Brands (STZ +2.66%) announced an equity investment totaling $4 billion in Canopy Growth, the largest marijuana stock by market cap. It marked Constellation's third such investment in Canopy since October 2017. Though the duo will almost certainly collaborate of new products, including infused beverages, Constellation Brands' 37% equity stake in Canopy Growth signals more than a simple partnership. This investment signals the belief that the pot industry is legitimate and a genuine source of growth potential in the years to come.
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Plenty of potential with a myriad of risk
Clearly, there's a lot of excitement surrounding infused beverages. Alternative consumption options almost always have higher price points and better margins than dried cannabis flower, meaning it could be a bottom-line needle mover for marijuana stocks and their partners. These alternatives are also a great way to attract consumers who may never have tried a cannabis-derived CBD or THC product before.
Not to mention that the market for CBD products (this includes more than just infused beverages) is expected to balloon from $591 million in 2018 to $22 billion by 2022, according to the Brightfield Group. That's a compound annual growth rate of 147%, and it's bound to attract brand-name partners.
But, rest assured, infused beverages are no surefire winner, even if Wall Street has given marijuana stocks the benefit of the doubt thus far.
One obstacle is that infused beverages aren't yet legal in Canada. When the Cannabis Act was passed in June, it was done so with only dried cannabis flower and cannabis oils being made legal. Other forms of consumption, such as infused beverages, edibles, vapes, and concentrates, are expected to be discussed and approved by Canada's Parliament this summer. However, there isn't a concrete timeline on when this'll happen, leaving the near-term future of infused beverages somewhat in doubt.
Another factor investors are probably overlooking is just how competitive this space could be. With Anheuser-Busch InBev diving into a joint venture with Tilray, it now marks at least three major beverage company partnerships that should result in an infused beverage line. Additionally, The Green Organic Dutchman announced in June that it would be devoting more than 20% of its peak production potential to an edibles and beverage facility (when these options become legal in Canada), with Heineken introducing its own line of cannabis-infused beverages in California. Sure, there may be a market for THC and CBD beverages in Canada, but if multiple competitors swoop in on the space, it could reduce or negate any impact on the bottom lines of these companies.
Will these beverage deals fizzle out? It's possible.
