Tilray Brands (TLRY 1.71%) -- and anyone considering being one of its shareholders -- should take a few hints from Anheuser-Busch InBev (BUD 0.12%) about how to become a globally relevant marijuana and alcohol company. After all, the maker of Bud Light knows a thing or two about running a brand-driven business.
In particular, there are three things that Tilray is struggling with that it'll need to do if its stock is going to be worth buying in the future. Let's examine each to see what needs to happen, using InBev's successes in the beer industry as reference points.
1. Produce its offerings profitably and at world-scale
InBev is profitable and it distributes worldwide, and in 2022 it leveraged both factors to bring in net income in excess of $5.9 billion. In contrast, Tilray's third quarter of 2023 saw its net and even its gross margins in the negative, with its gross losses totaling $11.7 million -- pretty much exactly in line with its unprofitable norm over the last three years. Before it's safe to invest in Tilray, that trend will need to change.
There are a few metrics that are worth watching, especially its cost of goods sold (COGS) as a percentage of revenue, which is currently at 108%. If Tilray is succeeding in driving its costs down quarter over quarter, it'll also show up in a rising gross margin. And once there's a trend toward profitability, its shares will likely rise accordingly. But merely some language from management talking about efficiency improvements or cost synergies isn't enough to go on -- it'll take a significant amount of real and sustained progress to tip this stock toward being one that you should own.
2. Build recognizable and high-value brands that elicit strong customer loyalty
Everyone knows of InBev's Budweiser beer brand, and lots of people have strong opinions about it; Bud Light alone holds a 10.6% share of the U.S. beer market, raking in around $974 million in sales in the first three months of 2023 alone. It's many people's favorite alcoholic beverage, and that's why InBev can count on customers to come back again and again, every year, no matter how much or how little it spends on marketing.
No company in the marijuana industry has any single brand that's remotely as powerful in the global cannabis market as Budweiser is in beer. Nor do any of Tilray's craft beer brands in the U.S. have much hope to seriously rival King Bud, as in its fiscal Q3 of 2023 its net beverage alcohol revenue was a scant $20.6 million. And while consumers likely do have favorite marijuana brands, few brands are distributed to everywhere that cannabis is legal, and the product landscape is segmented into a bunch of different form factors like dried flower, edibles, and vaporizers, not to mention being segmented into different economic strata.
With enough time and enough investment in creating and marketing products that appeal to customers' enduring tastes, Tilray could, should, and must build up its cannabis brands. In the long run, powerful brands are a competitive advantage that's impossible for a competitor to perfectly mimic, though it's also next to impossible to simply spend a lot of money to make a brand a consumer favorite immediately. To get an idea of which of its products are potentially going to become Bud-like in the future, keep an eye out for what management says about brand market shares; holding a steady portion of the market with a brand over time is a good sign.
3. Return excess capital to investors routinely and sustainably
The point of having competitive advantages like strong brands and efficient worldwide operations is that investors and management alike can count on the consistency of the company's ability to generate capital beyond what was put into the cost of production and distribution. As a mature alcohol business, InBev has plenty of free cash flow (FCF), with $8.1 billion for 2022, so it can afford to pay a dividend. What's more, even if the dividend needs to get cut back from time to time, like it did a few years ago in InBev's case, shareholders can still be confident in the health of the core business, as it's still producing more than enough money to cover its costs.
Tilray is much less mature than InBev, and it's still burning plenty of cash, but for the moment that's acceptable because the cannabis industry itself is far less mature than the beer business. Nonetheless, over the longer term, after its profitability issues are solved, Tilray should be in a position to attract new shareholders and retain its existing ones by paying a dividend. Of course, that's probably quite a few years off at this point, but investors can still appreciate that by the time it starts to disburse capital, a lion's share of the company's risks today will have been conquered. And that'll be another sign that it's ready to buy.
