What's faster than a bullet and more powerful than a speeding locomotive? Why, none other than the cannabis industry, which is transforming quicker than we journalists can keep pace. Long considered a taboo industry, marijuana is seeing its legality expanding at a breathtaking pace around the globe, with more than 40 countries having legalized medical cannabis, and Canada becoming the first industrialized country in the world to green-light recreational weed in October 2018.
In addition to rapid sales expansion, we're seeing a flurry of product expansion and innovation. Although the cannabis industry is often thought of in terms of dried cannabis flower, numerous alternative products aim to dethrone this old concept. For example, oils, vapes, capsules, concentrates, topicals, and even cannabis-infused beverages offer a means for consumers to use marijuana or related products.
New Age Beverages snags a whale
Beverages infused with tetrahydrocannabinol (THC), or more preferably cannabidiol (CBD), have been all the rage of late. THC is the psychoactive cannabinoid that gets a user high, whereas CBD is the nonpsychoactive cannabinoid best known for its perceived medical benefits. According to a recent report from food and beverage consulting firm Zenith Global, worldwide sales of CBD and hemp-infused drinks (remember, hemp is now legal in the U.S.) are expected to hit $1.4 billion in 2024, up from just $89 million in 2018. That's substantive growth, and it's bound to attract companies big and small.
Last week, one deal that seemingly surprised Wall Street and investors was the national tie-up between New Age Beverages (NASDAQ:NBEV) and the largest private employer in the world, Walmart (NYSE:WMT). According to the Monday morning press release from New Age Beverages, Walmart becomes the company's first national account. The retail giant will be carrying a full slate of Marley branded products, including Organic Marley Mate and Marley Cold Brew.
Marley, which was one of the fastest-growing brands in the New Age portfolio in 2018, will be initially shipped to Walmart distribution centers in April, with the retail giant taking up to two weeks to get them on store shelves. Meanwhile, New Age will be going all-out with regard to social and digital marketing efforts to promote its Marley brand in Walmart stores.
Even more exciting is the expected global launch, later this year, of Marley Mellow Mood plus CBD. Since CBD doesn't get a user high, it's an easy way to connect with first-time users. And, more importantly, alternative products have much juicier margins than traditional dried cannabis, so a new pool of users could be the ticket to substantial profits for CBD drink manufacturers.
Don't be surprised: Walmart is a logical partner for New Age Beverages
Though New Age received a nice lift from the news, and Wall Street seemed pleased with the tie-up, it really shouldn't surprise anyone. After all, the largest private retailer in the world hasn't been shy about its interest in CBD-based products.
In October 2018, Bloomberg reported that Walmart was tinkering with the idea of selling CBD products in Canada in its over-the-counter pharmacy aisles. At the time, Walmart Canada spokeswoman Anika Malik summed up that there was no firm plan in place to carry CBD products, but that Walmart was conducting "some preliminary fact-finding on the issue," as would be expected with any new and fast-growing industry.
What's more, Marijuana Business Daily reminded everyone in October that Walmart already sells hemp oil products online. Hemp has virtually no THC content, but is rich in CBD, making it a cost-effective crop to plant for high-margin CBD extraction. If Walmart is already selling hemp oil online, it's just a baby step forward for the company to carry CBD-containing products in its stores. With New Age announcing in September 2018 that it planned to create a line of CBD beverages, it created a perfect national partnership opportunity that was realized this past week.
Don't get too excited about New Age
However, as exciting as this partnership might appear, I wouldn't get overzealous about New Age Beverages prospects for a variety of reasons.
For starters, the U.S. Food and Drug Administration (FDA) has put its foot down in recent months on adding CBD to food, beverages, and dietary supplements. Although it'll be overseeing a public hearing on the matter and may adjust its policy on at least hemp-derived CBD as an additive, for the time being it remains something of an unknown substance to the FDA, and as such could be regulated very strictly in the United States. Translation: New Age's 2019 launch of a CBD-infused beverage may not go as well as planned.
Second, New Age Beverages' portfolio beyond Marley hasn't been anything to write home about. The company's reverse merger with Morinda does create a company with close to $300 million in annual sales, but in 2018 the company reported just $52.2 million in net revenue, which takes discounts into account. This was -- wait for it -- flat with the $52.2 million in net sales reported in fiscal 2017. Thus, even with strong organic growth from its Marley brand, New Age's entire portfolio flopped and failed to produce organic growth in 2018.
Lastly, don't think that New Age is the only pony in town when it comes to CBD-infused drinks. In Canada, Molson Coors Brewing partnered up with HEXO in August, Canopy Growth and Constellation Brands have tied up via an equity investment, and Tilray and Anheuser-Busch InBev are working together on a joint venture. All of these arrangement will lead to nonalcoholic CBD-infused beverages hitting dispensary store shelves in Canada by October, and they'd have no problem entering the U.S. market if the opportunity presented itself.
All told, this was a good move for New Age Beverages, but it doesn't yet demonstrate that the company has turned the corner to generating long-term organic growth.