Though cannabis has been viewed by some as a threat to the spirits industry, Constellation Brands sees it as an opportunity with marijuana cocktails. (Matthew Mead, The Associated Press)

Alcohol Goliath pours $190M into Canadian cannabis company

Constellation Brands, the alcohol goliath that two years ago acquired craft beer darling Ballast Point Brewing Co. for $1 billion, is putting its money toward another emerging sector — cannabis-based beverages.

The Victor, N.Y.-based company plans to spend C$245 million ($190.88 million USD) to acquire a 9.9 percent stake in Canopy Growth Corp., the companies announced Monday. Canopy, itself a giant in the emerging Canadian and international cannabis markets, produces and sells marijuana through its brands such as Tweed.

The Wall Street Journal first reported about the investment on Sunday.

Constellation will provide support in areas such as consumer analytics, marketing and brand development, Canopy officials said Monday, adding that the companies will collaborate in developing cannabis-based beverages for adults in areas where marijuana is federally legal.

The terms of the deal include an option for Constellation to increase its future ownership interest in Canopy to nearly 20 percent, Constellation spokesman Michael McGrew told The Cannabist on Monday.

“Canada is expected to become the second country to fully legalize cannabis for adult recreational use at the national level,” McGrew wrote via email. ” We feel it is strategically important to be cognizant of and knowledgeable about this emerging and potentially disruptive market.

“But it’s important to note that we have no plans to sell any cannabis-related products in the U.S. or any other market unless or until it is legally permissible to do so at all government levels.”

Federally legal adult-use cannabis sales are on the horizon in Canada, however, the program’s July 2018 launch likely will allow for the sale of only cannabis flower. The regulated sale of edibles (including beverages) and concentrates is expected to come a year later.

Don’t expect Canopy executives to sit around their Smith Falls, Ontario, headquarters twiddling their thumbs until July 2019.

“We’re not really good about standing around and waiting,” Bruce Linton, Canopy’s chief executive officer, said in an interview Monday. “It’s a great environment when you have licensed rights to be inventive, and you can’t sell the goods.”

Cannabis beverages, in particular, piqued Canopy’s interest. The provincial authorities that could oversee cannabis sales are comfortable with the liquid form, Linton said, noting they’re the same bodies that govern alcohol sales.

“I don’t think we’re a wild outlier on the probability of (cannabis beverages) becoming a governed product,” he said.

Neither Canopy nor Constellation officials mentioned the possibility of an alcoholic beverage infused with THC.

UPDATE: Launch of cannabis beverages in Canada could be “big business” for alcohol Goliath

Canopy has positioned itself as an industry leader, setting the market standard in innovation while ensuring compliance with the rules and regulations for the provinces throughout Canada, said Jonathan Sherman, a Cassels Brock attorney who closely tracks the Canadian cannabis industry.

Whether R&D could dictate policy remains to be seen, he said.

“I don’t know if (cannabis beverage regulations approval) comes down to lobbying or if it’s more demonstrating a need for a product” that is safe, regulated and desirable in the (Canadian) market, he said.

Potable, profitable

The fledgling cannabis-based beverage segment has flourished in the early years of America’s state-based recreational cannabis legalization, data show.

For the first six months of 2017, cannabis beverage sales in Colorado, Oregon and Washington, totaled $13 million, up 26 percent from the comparable year-ago period, said Greg Schoenfeld, vice president of operations for BDS Analytics, a Boulder, Colo.-based cannabis analytics firm.

Colorado, the most mature market of the three, accounted for the lion’s share of the sales with $7.95 million, according to BDS. That’s up 27 percent from the first half of 2016.

It’s not explosive growth, but the segment is showing gains every single month, Schoenfeld said.

“We do have a fair amount of delineation — some (companies) are focused on carbonated drinks, others coffee, other tea,” he said. “It’s still a fairly diverse category.”

In Colorado, cannabis beverage sales are on track to hit between $15 million and $15.5 million this year, he said. The segment brought in $12.5 million in 2016 and $7.9 million in 2015, he added.

Beverages claim a 1 percent market share in Colorado, he said. As other legal markets mature, Schoenfeld anticipates they will have a similar make-up.

“When brands invest in developing new products and new categories, there tends to be a response if it’s a well thought-out product,” he said. “There are opportunities for brands to continue to expand the market as well as take it into new directions.”

A deal based on optimism

Confident cannabis-based beverages will be legalized — and profitable — in Canada, Canopy began looking for partnerships with companies already in the beverage market, CEO Linton said.

The company approached Constellation last year after the alcohol conglomerate’s CEO publicly expressed a business interest in developing cannabis beverages.

“Why wouldn’t big business, so to speak, be acutely interested in a category of that magnitude,” CEO Rob Sands told Bloomberg News in November 2016, less than a week after eight states voted to legalize the medical or recreational use of marijuana. “If there’s a lot of money involved, it’s not going to be left to small mom-and-pops.”

Sands’ optimism came at a time when other alcohol purveyors expressed wariness — some publicly in regulatory filings — about the emerging cannabis market and its potential to depress sales.

Meanwhile, a Cowen & Co. equity research report released in late November 2016 suggested that beer volume sales in recreational marijuana states of Colorado, Oregon and Washington under-performed the overall U.S. beer market by 2.6 percentage points.

Constellation, which recorded $7.3 billion in revenue during its past fiscal year, has a portfolio of liquor and beer brands that include as Corona, Mark West, Ballast Point and Svedka. Constellation’s sales don’t appear to have been dinged by cannabis, spokesman McGrew said.

“Based on modeling we’ve seen, cannabis does not seem to have had a negative impact on overall beverage alcohol trends. That said, we do feel it is strategically important to be cognizant of and knowledgeable about this emerging and potentially disruptive market,” he said.

And cannabis has been a “global trend we’ve been watching for some time,” McGrew added.

The investment that comes at a relatively low risk level for Constellation could be a bright spot of some magnitude for Canopy, said Vivien Azer, a Cowen & Co. analyst who specializes in the beverage, tobacco and cannabis sectors.

“From a branding, packaging, product form … but most importantly, from a distribution perspective, that’s where Constellation can really lend (its) expertise,” she said.