Legal marijuana is one of the fastest growing industries in North America right now, and there's a very good chance it'll stay this way for at least a few more years. Having generated $12.2 billion in global sales last year, per Arcview Market Research and BDS Analytics, legal pot sales are expected to surge to more than $31 billion worldwide by 2022.
This rapid growth has been the impetus behind aggressive capacity expansion initiatives and consolidation since the beginning of 2018. But it's also gotten the full and undivided attention of the traditionally slower-growing food and beverage industries, which are always looking for ways to enhance top-line growth and bolster profitability.
Brand-name partnership opportunity pick up for pot stocks
The potential of partnering a brand-name company with a world-class cannabis stock was first noted in October 2017, when Modelo and Corona beer maker Constellation Brands made the first of what would become three investments into Canopy Growth. Although Constellation has motives here that extend beyond a simple partnership (i.e., it holds a 37% equity stake in Canopy), the initial stake signaled that the duo would be working on new products, including nonalcoholic cannabis-infused beverages.
In early August, the market was surprised when Molson Coors Brewing announced that it would be forming a 57.5%-42.5% joint venture with Quebec-based grower HEXO to develop nonalcoholic cannabis-infused beverages under the name Truss. These beverages are expected to hit dispensary shelves in Canada by this coming October.
The point being that big-name deals are happening, but we're ultimately still in the early innings of the legal cannabis rollout in Canada and throughout much of North America.
The bigger question is: Which brand-name food and beverage companies are next to seek out a partner in the marijuana industry?
Coca-Cola may be out, but these food and beverage companies may want in on the cannabis craze
About the only company we know that won't be is Coca-Cola (NYSE:KO). Aside from getting a finger-wag from large shareholder Warren Buffett, Coca-Cola has reiterated on numerous occasions since the fourth quarter that it's looked at the pot industry, but currently has no intention of seeking a partner or creating its own products. As a reminder, Coca-Cola was in talks with both Aphria (NASDAQ:APHA) and Aurora Cannabis (NYSE:ACB) last year about a possible equity stake and/or partnership, but nothing wound up materializing from these discussions.
That leaves three prominent food and beverage companies that do appear interested in getting in on the cannabis craze.
First up is alcoholic beverages maker Diageo (NYSE:DEO), which hasn't been shy about its interest in the cannabis industry. Although Diageo has done well with its portfolio of Johnnie Walker, Crown Royal, Captain Morgan, and Guinness beer, to name a few of its top brands, there's always room for sales improvement throughout North America. That's where dipping its toes into the cannabis pond could come in handy.
Like Coca-Cola and its peers, Diageo has been monitoring the marijuana industry closely and might currently be hesitant to strike a deal because of early stage teething pains being experienced in Canada right now. Supply shortages, especially for premium-quality cannabis products, could extend for another 24 months. Plus, cannabis derivatives, such as infused beverages, won't be given the green light by Health Canada until October.
But if Diageo does take the plunge, Aphria would be one of the most logical partnership opportunities. That's because Tom Looney, an addition to Aphria's board of directors late last year, was previously the president of Diageo's U.S. Spirits and Canada division. Looney is the perfect person to bridge the gap between both companies and bring Aphria's superior production under the same umbrella as Diageo's premier marketing and deep pockets.
Whereas Coca-Cola has made clear that it's on the outside looking in when it comes to marijuana, PepsiCo (NASDAQ:PEP) hasn't been as committal. Although the company did say it had no plans to enter the cannabis space in its late October quarterly conference call, CFO Hugh Johnston noted in a CNBC interview that cannabis was still on the table the same day as PepsiCo's earnings release. With sales growth stagnating over the past five years, it's pretty clear that PepsiCo needs a spark to reignite a floundering portfolio of beverages and snacks.
One possible solution could be to dive right in with a leading producer like Aurora, which has plain-as-day suggested that it wants to enter the infused beverage market. Aurora may not have been able to strike a deal with Coca-Cola, but PepsiCo would, in a rare instance, be able to one-up its primary rival by landing an equity deal, joint venture, or partnership with Canada's largest aggregate weed producer. Not to mention that Aurora's focus is on the higher-margin medical marijuana community, which is far more willing than adult-use consumers to buy derivative products.
PepsiCo could also take a safer route and dabble only in cannabidiol (CBD)-based products. CBD is the nonpsychoactive cannabinoid best known for its perceived medical benefits. Should it choose to go this route, a major, but more under-the-radar pot stock might be a smarter choice. For instance, OrganiGram Holdings, which is actively looking for a beverage partner, would probably cede all control of beverage development to a company like PepsiCo, which PepsiCo's management would probably appreciate given its marketing and product development expertise.
A third brand-name food and beverage company that looks to be ready to join the marijuana craze is Mondelez International (NASDAQ:MDLZ). As with Coca-Cola, Mondelez initially stated that it looked at the cannabis space but chose to keep its distance. Now, just months after its initial decision to stay on the sidelines, the company looks ready to be a prime participant.
In an interview on CNBC's Squawk on the Street earlier this month, Mondelez CEO Dirk Van de Put announced that the company is giving serious consideration to adding CBD to certain product lines, such as Chips Ahoy cookies, Cadbury chocolate, Nilla Wafers, and Nutter Butter cookies. Said Van de Put, "Yes, we're getting ready [to develop CBD-infused snacks], but we obviously want to stay within what is legal and play it the right way." Van de Put went on to add that adding CBD to its family brands, such as Oreo, may not be in the company's best interests.
Although Mondelez has an entire field of cannabis companies to consider for possible partnership opportunities, Aurora Cannabis may again make the most sense. Aurora hired billionaire activist investor Nelson Peltz in mid-March to act as its strategic advisor. The thing is, Peltz has hands-on experience in trying to extract shareholder value in the food and beverage industry, and currently owns a sizable position in Mondelez, with Trian Fund President Peter May on Mondelez's board of directors. Just as Looney is the perfect facilitator between Diageo and Aphria, Peltz is potentially a perfect intermediary between Mondelez and Aurora Cannabis.