Alcohol companies get a buzz from playing offense in cannabis industry

What do alcohol companies do to hedge against slowing growth in their main business? The answer is to invest heavily in the marijuana industry.

On a conference call with Wall Street analysts Thursday, Constellation Brands Inc (NYSE:STZ) CEO Rob Sands explained how alcohol companies could rewrite their growth playbook.

“We’re not a company that’s sitting around waiting for some element of our business to turn down or get bad before we take action,” said Sands.

“We’re the opposite of that. When it turns bad, turning something around is 900 times harder than it is to play offense from an already very strong position,” he added.

Of course, in liquor and beer giant Constellation’s case playing “offense” has meant sweeping $4 billion into Canadian cannabis company Canopy Growth Corp (NYSE:CGC, TSX:WEED) to ride its stake in the company to 38%. The company earlier held a 9.9% stake in Canopy in October 2017 with the option for future investments.

It is the biggest known deal in the marijuana industry and shows just how far traditional alcohol companies are willing to go to find growth.

“We continue to be extremely bullish, if not more bullish, since we’ve announced the Canopy deal,” said Sands.

Sands remarks come as the US House and Senate try to finalize the 2018 Farm Bill, which appears likely to legalize industrial hemp.

The legality of CBD products is a muddled and gray area. For years, federal law regulated hemp alongside marijuana as a “controlled substance,” making it illegal to sell certain extracts or derivatives. In 2014, a federal farm bill let states start pilot programs to study the growth, cultivation and marketing of hemp. “Some companies interpreted that as a green light to sell CBD-containing products,” reported The Wall Street Journal.

A new farm bill which is in the works will replace the 2014 Farm Bill which expired on September 30. CBD, or cannabidiol, a nonpsychoactive compound found in the cannabis or hemp plant is often touted as a pain reducer and helps with anxiety and sleep.

Marketers are selling products containing cannabidiol, or CBD, a chemical found in hemp, but the actual legal landscape in the US is unclear.

When asked whether Constellation or Canopy would handle the potential sale of CBD-infused drinks if the new US Farm Bill gets passed, Sands was definitive, “The answer is both.”

READ: Constellation Brands shares rally on stellar fiscal 2Q earnings that beat Street; cannabis investment tops $1B in gains

Alcohol companies on the sidelines can’t miss the fact that Constellation’s investment in Canopy Growth has already generated more than $1 billion in gains as marijuana stocks rocket.

Constellation said Thursday that its initial investment in Canopy has produced $639 million in unrealized gains in the second quarter, and a gain of $1.3 billion since the investment in November 2017.

Cannabis stock investments aside, there are other good reasons for why alcohol companies need to leap into the cannabis space.

“About 80% of consumers do report some kind of reduction in alcohol consumption when they’re also engaging in cannabis consumption,” Vivien Azer of Cowen told CNBC.

READ: Youngevity shares fly on November launch of two new cannabidiol products

Molson Coors Brewing Co (NYSE:TAP) listed legal cannabis among the biggest possible risks to its business in its annual shareholder report earlier this year.

“The emergence of legal cannabis in certain US states and Canada may result in a shift of discretionary income away from our products or a change in consumer preferences away from beer,” said the brewer.

Molson Coors has since decided that if you can’t beat them, it’s better to join them. It has formed a joint venture with Hydropothecary, a weed producer, to make cannabis-infused beverages.

Heineken’s Lagunitas brand has also started selling nonalcoholic sparkling water featuring THC, the active component of marijuana

Contact Uttara Choudhury at [email protected]

Follow her on Twitter: @UttaraProactive 

Story by ProactiveInvestors