Why Cannabis-Infused Beverages Will Outperform

Why Cannabis-Infused Beverages Will Outperform
Why Cannabis-Infused Beverages Will Outperform
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  • Enormous cannabis revenues available as an alcohol-substitute (> $100 billion)
  • Declining alcohol sales are pressuring multinationals to enter the cannabis space to add new revenue streams
  • Beverage giants bring enormous financial, marketing, branding clout
  • Beverages are the preferred consumer product for social interaction
  • Smaller specialty players in infused beverage space are take-out targets
 
Cannabis-infused beverages: the next “big thing” in cannabis, or much ado about nothing? Opinions can be found here in the cannabis industry on both sides of the fence.

The argument against setting high expectations for this cannabis product can be summed up in two words: the numbers. To date, sales of cannabis infused beverages have made up a small piece of the overall cannabis revenue pie.

The rebuttal to that is that sales growth of these products has been robust. A November 2018 article provides some numbers.
 
Flowhub, a POS company, has indicated that beverage sales have increased 88% year over year from 2016 to 2017, with that trend seemingly continuing in 2018. When Flowhub compares data from the first half of 2018 against data from the second half of 2017, beverage sales have increased 18%.

A small base with robust growth. But what’s the Big Picture here?

In a recent TSI Exclusive, we looked at the enormous potential of recreational cannabis as an alcohol substitute.
 
  • The alcohol industry is a $1 trillion per year sector with declining sales
  • A survey of Canadian cannabis consumers found that: 70% reduced their alcohol consumption as a result ,41% reported using cannabis “as an alternative to alcohol”
And the popularity of cannabis consumption is not just centered among young adults. If fact, slightly more Americans aged 45 – 64 now favor full cannabis legalization (65%) versus those under 25 (64%). Much of this increasing popularity among middle-aged Americans is coming from educated professionals.

Consumers want to substitute cannabis for alcohol as a recreational drug. If just 1/7th of that demand was shifted to cannabis, that would translate into an additional $150 billion per year in cannabis revenues. That’s the equivalent of consuming cannabis instead of alcohol one day per week.

What is the best product vehicle for the cannabis industry in capturing the enormous revenue dollars on the table here? According to many senior executives both inside and outside the cannabis space, the answer to that question is cannabis-infused beverages.



Canada already has a national market for legalized cannabis and is introducing cannabis-infused beverages in Phase 2 of legalization. This makes the Canadian market perhaps the biggest opportunity in this space at present.  

Constellation Brands (US: STZ), the maker of Corona Beer didn’t invest $4 billion in Canopy Growth Corp (US: CGC / CAN: WEED) because it wanted to get into selling cannabis-infused cookies.

Molson Coors (US: TAP) has also entered this derby, via a joint venture with Canadian-based HEXO Corp (CAN: HEXO / US: HEXO) – Truss Beverages. Mark Hunter, CEO of Molson Coors is on the record as seeing the potential for a CAD$3 billion market for cannabis-infused beverages in Canada.

For investors, 1/7th of Canadian alcohol sales (CAD$22.1 billion in revenues, StatsCan 2017) works out to approximately CAD$3 billion by itself. Is this setting long-term sights high enough for this segment of the cannabis sector?

One specialty player in this niche that believes it can make a big splash is Sproutly Canada Inc. (CAN: SPR / US: SRUTF). The company claims to have fully water-soluble infusion technology, to provide greater consistency and rapidity of effect along with greater efficiency in beverage production.

BevCanna Enterprises Inc. is a private company that has just announced entry into this market. It plans to build on its existing product line of alkaline water beverages as well as offering powdered drink mixes.

Another public cannabis company with an informed opinion here is Hill Street Beverage Company (CAN: BEER / US: HSEEF). Hill Street already manufactures award-winning, non-alcoholic beers and wines and is also entering the cannabis-infused beverage market.

CEO Terry Donnelly shared these thoughts.
 
"The tradition of sharing a fermented beverage goes back 10,000 years. One of the origins was spilling a little of my beverage into your glass and vice versa while ‘clinking glasses’ and looking directly into your eyes. If you showed fear, then chances are you had poisoned me. So sharing a beverage was one of the earliest ways to learn if you could trust someone. It helped create a bond of friendship, loyalty, and trust way back then, and still does now.”

If “sharing a fermented beverage” is such an integral aspect of human socializing, why are alcohol sales now in permanent decline? Two words: health issues.

As a toxic and addictive substance, alcohol use has always presented serious health risks including liver cirrhosis, cancer, and diabetes. Because of this toxicity, it is also dangerous in combination with numerous drugs.



Presented with these increasing risks to their health and their lives, people are reducing alcohol consumption or giving it up entirely. Enter cannabis.

Cannabis is non-toxic and non-addictive. It carries no serious long-term health risks. It’s safe in conjunction with other drugs.

Solution: bottle cannabis (i.e. the cannabinoids contained) into beverages and consumers can drink these beverages socially instead of dangerous alcohol products.

It’s not quite that simple. More infrastructure is required. Additional logistical issues are present that are not involved with dried cannabis or cannabis concentrates.

However, as investors can already see, there is a strong-and-growing motive within the alcohol industry to bankroll the production and marketing of cannabis-infused beverages: survival.

If the alcohol industry is now an industry in permanent decline (and the data seems to support this), then this industry collectively needs to find $10’s of billions – and potentially $100’s of billions – in new revenue streams.

Some beverage giants are already positioning themselves here. Newcomers to this sub-sector will likely choose to buy existing assets/expertise here rather than attempt to develop a cannabis-infused beverage line from the ground up.

Consumers want cannabis as a substitute to alcohol. The alcohol industry needs new, large revenue streams. Cannabis-infused beverages appear today to be the product that best marries these two major industry drivers.

With both multinational players and smaller companies already active here, investors interested in this opportunity should not waste time.


 
DISCLOSURE: the Writer personally holds shares of Hill Street Beverage Co.
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["Cannabis Focus", "Cannabis Industry"]
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