Canopy Growth (NASDAQ:CGC) has a problem. The company isn't growing fast enough, and it hasn't been profitable enough to justify its place atop the cannabis industry. Investors have grown frustrated with Canopy Growth missing sales targets and continuing to suffer significant losses. The "cannabis 2.0" market that is about to launch in Canada, giving consumers access to new marijuana products, could help Canopy Growth deliver much stronger results. The danger, however, is that the company could be too focused on a segment of the market that might not be all that lucrative: beverages.
Opening a state-of-the-art facility
Last month, Canopy Growth received secure storage and operating licenses for its beverage facility at its headquarters in Smith Falls, Ontario. The company calls it a "state-of-the-art" location where it will produce 11 cannabis-infused beverages. In total, Canopy Growth now has 10.5 million square feet of licensed production capacity in Canada that will help it meet the demand for new and existing cannabis products.
Building the facility was a significant project that involved Canopy Growth leaning on the expertise of its key investor, Constellation Brands, for help. Despite the cost, Canopy Growth is banking on the opportunity it could create. Outgoing interim CEO Mark Zekulin stated in a press release that "Cannabis beverages have the potential to introduce an entirely different demographic to the cannabis category by presenting them with a familiar product format and an onset time akin to beverage alcohol."
Canopy Growth is anticipating that many beer drinkers will decide to give cannabis-infused beverages a try. However, that might not come to fruition for a couple of reasons.
The market is merely a maybe
Cannabis-infused beverages aren't new. Many states that have legalized pot in the U.S. currently sell them. However, the results have been less than inspiring. Cannabis research company BDS Analytics estimates that only 5% of edible sales in 2018 came from beverages. And edibles are just a small subset of all cannabis sales, accounting for approximately 15% of the industry's total sales. BDS referred to beverages as a "small, yet growing portion of edibles."
Another research company, Fortune Business Insights, projects that cannabis beverages globally will be worth $2.1 billion by 2026. Meanwhile, Grand View Research estimates that by 2025, the total market for legal marijuana across the globe will reach $66.3 billion. Analysts and experts are anticipating cannabis beverages will be a very niche segment of the overall market.
Lack of advertising is another reason cannabis-infused beverages might not take off in Canada. It's harder to get the word out about them than it is about beer, for instance. Laboring under heavy restrictions, plain-packaging laws, and minimal ways for customers to learn about the products in Canada, Canopy Growth will face an uphill battle to generate significant sales growth in the beverages segment. If beverages aren't a big slice of the pie in the U.S. market, where companies have a lot more leeway in terms of advertising, there's little hope that the Canadian market will fare much better.
Why should investors care?
Canopy Growth stock has fallen more than 35% this year, and as long as the company continues to report significant losses, a timely recovery seems unlikely anytime soon. Investing a lot of money in a segment of the market that might not generate significant growth is not the best use of the company's funds. The company is already burning through cash, so it's paramount that management not spend any money it doesn't need to.
Unfortunately, investing in a facility devoted to beverages doesn't look like a wise spending choice. Yes, cannabis-infused beverages will help give Canopy Growth's sales a boost, but the segment might not be as promising as needed for this move to pay off. Being too optimistic about growth is how Canopy Growth got into this sad situation. If beverage sales are disappointing, investors could see the popular marijuana stock fall even further in price.