Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.
This U.S. multistate cannabis operator just landed a game-changing cannabidiol distribution deal.
*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.
There's pretty much no hotter topic at the moment than legal marijuana. Even with cannabis stocks running into some hurdles in May, the industry has, as a whole, greatly outperformed the broader market in 2019 and has been running circles around every other industry since the beginning of 2016.
The reason? Look no further than Wall Street's projections calling for a roughly fourfold to sixfold increase in global marijuana sales between 2018 and 2029 or 2030 (depending on the source and estimate). If these growth figures prove accurate, the legal weed industry could be capable of average annual growth in the double digits for well over a decade.
But within the cannabis industry are a number of faster-growing niches. Perhaps no aspect of the cannabis movement is generating more buzz right now -- which is ironic, as you'll read in a moment -- than the rise of cannabidiol (CBD).
Image source: Getty Images.
Cannabidiol is the nonpsychoactive cannabinoid best known for its perceived medical benefits; in other words, it won't get a user high or buzzed. Yet that hasn't stopped its ascent -- in reality, this aspect might be directly responsible for its rise, given that it may encourage users who might not otherwise buy cannabis products to try CBD. Since CBD can be infused into all sorts of derivatives, such as edibles, beverages, oils, sprays, capsules, and topicals, users don't even need to smoke or vape in order to consume it.
According to aggressive estimates from the Brightfield Group, CBD sales in the U.S. are expected to surge from a mere $591 million in 2018 to as much as $22 billion by 2022. For you math-phobes out there, that's a 147% compound annual growth rate, and it blows the potential global growth rate for the weed industry as a whole out of the water.
Now, keep in mind that CBD can be extracted from cannabis and hemp. Hemp is traditionally easier to grow of the two, and less costly. Plus, with the passage of the 2018 Farm Bill, industrial production and hemp-derived CBD extracts are now legal across the country. That makes hemp production and processing a vital part of the U.S. CBD market.
To date, a number of brand-name retailers have begun carrying CBD products, mostly in topical form. This includes pharmacies such as CVS Health, Walgreens Boots Alliance, and Rite Aid, as well as Designer Brands, the designer-shoe retailer formerly known as DSW.
However, a new player is ready to emerge where consumers can purchase CBD products: your local gas-station convenience store.
Image source: Getty Images.
Last week, U.S. multistate dispensary operator Harvest Health & Recreation (HRVSF +0.00%) announced that it had signed an agreement with the Asian American Trade Associations Council (AATAC) to provide its Colors, CBx Essentials, and Harvest-branded CBD products to more than 10,000 convenience stores and gas stations.
The press release notes that AATAC is a large trade association for independent convenience stores and gas stations, with approximately 50,000 members representing nearly 90,000 locations across the country, and reaching roughly 60% of the U.S. market. Even though many of these stores are branded as Chevron, Shell, ARCO, BP, Sunoco, or 76 (to name a few of the better-known AATAC members), they're usually operated by independent owners. Harvest Health will be reaching more than 10,000 of these locations by this summer, but may hit up to 30,000 locations with its CBD products by the end of the year.
How big of an opportunity is this? Of the Brightfield Group's projected $22 billion in U.S. CBD sales by 2022, AATAC foresees $8 billion to $10 billion to come from convenience stores and gas stations. Since margins tend to be very high on CBD products, store clerks are expected to receive training on them, with plenty of in-store shelf space being devoted to CBD, and liberal spending on marketing promotions. Gas stations are a traditionally low-margin business model, so a product that singlehandedly boosted customer traffic and bore high margins would be a win-win.
Jason Vedadi, chairman of Harvest Health, had this to say:
This exclusive partnership enables a massive advance in distribution for Harvest-owned CBD brands and follows our strategic path of expanding the scale of our wholesale and retail distribution nationally. Demand for CBD is unprecedented and by delivering leading products in 10,000 accessible locations gives us an unparalleled reach to consumers.
Image source: Getty Images.
This distribution deal isn't Harvest Health's first victory. It's been active on the acquisition front, and currently looks to be the leader of vertically integrated dispensary stocks in the U.S., if licenses are a measure of success.
As of the end of March, Harvest Health was only operating 13 stores in five states. But on a pro forma basis, which assumes that all of its pending acquisitions close, Harvest Health will have the rights to 230 facilities, of which 142 will be retail stores, in 17 states. No publicly traded dispensary operator is even close to Harvest Health in terms of licenses held for retail locations (on a pro forma basis), with most major multistate operators hovering between 50 and 85 retail store licenses held. This gives Harvest Health a presumed market-share advantage, assuming it has the capital and ability to get these dispensary locations, as well as grow farms and processing centers, up and running.
On the other hand, vastly expanding its consumer reach is going to cost quite a bit of money. Having previously been profitable on an operating basis, Harvest Health produced an operating loss of close to $17 million in the first quarter (through March). This had to do with skyrocketing general and administrative expenses (year over year), and a significant increase in marketing and sales expenses. These costs would only be expected to grow as Harvest Health's presence expands nationally.
Yet despite this near-term increase in costs, Harvest Health has established itself as a clear distribution leader in the U.S. cannabis space. Within the next couple of weeks or months, you should expect to see its products popping up in a number of branded gas stations and convenience stores across the country.