TLC for THC — Constellation Adds Pot Products to its Portfolio

Austin Ray
static1.squarespace.png

THE GIST
Constellation Brands announced yesterday that they’re further diversifying their already wide-ranging portfolio by buying a 9.9% minority stake in Canadian marijuana company Canopy Growth Corp. for $191 million. Investment into the marijuana industry is nothing new, with big-time spenders ranging from individuals like Peter Thiel to Silicon Valley venture capital firms, but Constellation is the first major alcohol company to do so. The immediately announced goal is to partner on cannabis-infused beverages, though they won't be available for sale in the U.S. until pot is legalized nationwide, the company said. Products would be made available in Canada, where marijuana is expected to be legalized in 2018.

Long before Constellation became known to beer enthusiasts for importing Mexican beer brands like Corona and Modelo and buying Ballast Point and Funky Buddha, it had already built something of an empire on wine and spirits. Its leadership has long cited and shown interest in a broad range of products to fill Constellation's portfolio, eyeing high-end, higher-price-point brands, which has shown in recent acquisitions across wine, spirits, and beer. This includes the recent creation of an administrative Craft & Specialty Beer Group following their acquisition of Funky Buddha, the second craft beer brand in the portfolio.

Meanwhile, their larger competitors such as AB InBev continue to attempt to rally the beer industry against wine and spirits in a decades-long battle for what they call “share of throat,” arguing that beer category health is declining. Indeed, their grip on mass domestics is losing strength.

“The volume isn’t coming back,” said an executive presenting at the Beer Marketer’s Insights conference this past year.

WHY IT MATTERS
It appears Constellation sees the next step in this formula is preparing for changing attitudes and expectations of the marijuana market. There’s lots of space for trial and error to see what will work, with speculation of everything from mass producers to “small batch, sustainable” bud. It may be unclear which direction(s) consumers and businesses will go, but at least in Canada, where the Constellation-Canopy products are expected to debut, estimates suggest a burgeoning cannabis market could be worth $5-$10 billion. Like the evolution in beer, wine, and spirits, there will be an inevitable shift into different tiers of perceived quality in creation and consumption. Or, at least, that’s what people think and are preparing for in areas of marketing, agriculture, and product innovation.

Even if current laws don't make America a marketplace right now, it's definitely the right time for Constellation to make this move, which comes as a recent Gallup poll notes 64% of Americans now support legalizing cannabis, a record high in almost 50 years of surveying U.S. sentiment on the change. Notably, legalization was supported by a majority of respondents across self-identified democrats (72%), independents (67%) and, for the first time, republicans (51%).

Depending on who you ask, changing attitudes toward the drug comes as a direct threat to America's alcohol industry, which could make Constellation's latest buy a safe, long term bet. Several marijuana-specific groups and businesses have organized their own polls in recent months trying to show how pot can steal share from beer, wine, and spirits.

In April, cannabis company OutCo reported that 51% of California millennials would swap pot for alcohol, with 34% saying they'd choose it over beer specifically. Eaze, a cannabis delivery company, used their own survey of California marijuana users to show that 87% of their respondents reduced their amount of alcohol consumption when they started smoking or consuming pot. The list goes on, including from the aptly named CannaBiz Consumer Group, which estimated that beer sales have declined 7% in states where pot is now legal.

The trouble with these results is potential bias, both in who's sponsoring the research and those answering questions, often identifying as marijuana users. Findings may have some truth to them, but also don't present a fully accurate picture of what a perceived battle between cannabis and alcohol might be.

Even still, more "traditional" backers suggest some kind of impact. In 2016, Cowen and Company suggested that beer sales in Colorado, Oregon, and Washington could be underperforming due to an increase of cannabis use among millennials, though decreases were still "consistent" with national trends. Earlier this year, market research firm IRI partnered with CannaBiz on a survey that showed 82% of respondents would give up beer if pot was legalized.

But don’t consider the data as gospel.

Bart Watson, economist for the Brewers Association, said studies he’s so far seen linking changes in alcohol consumption due to marijuana use have suffered from self-selected samples and don’t give an accurate portrayal of the general population. It’s amounted to “zero evidence” of impact.

“You can kind of cherry pick examples, as are often done in some of these studies of states where beer volume is down and cannabis sales are up,” he tells GBH. “But when you look holistically with the states that have had recreational or medicinal cannabis in recent years, their volume trends look exactly like you would expect, given overall beer volume trends, given their share of craft, their changes in population, things like that.”

Michael Uhrich, chief economist at the Beer Institute, sees the same thing, noting that research by the organization has focused on Colorado, Oregon, and Washington as part of normal monitoring of behaviors and attitudes toward trends in the beer industry. “Our research shows, at least to this point, that legalization of recreational marijuana has not had an impact on beer sales,” Uhrich says.

No matter what the current situation might be, it's important to consider Constellation's ability to make such a move. In the company's 2017 fiscal year results, they reported records in net sales ($7.3 billion) and operating cash flow ($1.7 billion). According to their own findings, Constellation's full portfolio of beer, wine, and spirits accounted for 25% of total beverage alcohol growth in the U.S. during their past fiscal year. They're riding high and have money to burn, which allows them to be more proactive with their finances in identifying and being a part of evolving trends. In a press release, Constellation CEO Rob Sands noted "an emerging market that is predicted to become a significant consumer category in the future.”

“Our company’s success is the result of our focus on identifying early stage consumer trends, and this is another step in that direction," Sands said.

To that end, Sands said last year that Constellation’s long-term plans would include marijuana. Valuations of the U.S. market suggest that the drug could produce as much as $50 billion in revenue by 2026. “If there’s a lot of money involved, it’s not going to be left to small mom-and-pops,” Sands said In a 2016 interview with Bloomberg. Because of that, and Constellation’s diversity of products, he sees his company as the right one to capitalize.

“People who are using cannabis may be disinclined to drink as much as they might have otherwise, but maybe they weren’t going to drink in the first place and then they drink something,” Sands told Bloomberg. “Maybe the whole thing will work out synergistically.”

Per Constellation’s release, their latest deal leaves open the potential to acquire additional ownership interest in Canopy Growth.

—Bryan Roth