Firms bet­ting on pot may be worse off when the smoke clears

Beer and liquor com­pa­nies are in­vest­ing in mar­i­juana in case cus­tomers im­bibe less

The Hamilton Spectator - - Business - JUSTIN LAHART

NEW YORK—The cannabis in­vest­ing frenzy has reached a fever pitch. With recre­ational mar­i­juana use be­com­ing le­gal in Canada next Wednesday and le­gal­iza­tion ef­forts in the U.S. mak­ing steady progress, it seems like ev­ery­one from for­mer Speaker of the House John Boehner to singer Jimmy Buf­fett wants a piece of the ac­tion. Shares of mar­i­juana com­pa­nies have soared, star­tups are pro­lif­er­at­ing and, while there may be a great deal of money to be made, there may also be a great deal of money to be lost.

It is, in other words, ex­actly the type of high-risk si­t­u­a­tion in which re­tail in­vestors would be bet­ter off as spec­ta­tors rather than par­tic­i­pants. But for com­pa­nies in the busi­ness of selling those other so­cial lu­bri­cants— beer, wine and liquor—the cal­cu­lus is very dif­fer­ent. For them, not in­vest­ing in cannabis could turn out to be even riskier than in­vest­ing in it.

Corona brewer Con­stel­la­tion Brands has in­jected about $4 bil­lion into Cana­dian cannabis com­pany Canopy Growth, and has an op­tion to in­vest an­other $3.4 bil­lion to ac­quire a con­trol­ling stake. Mol­son Coors this month formed a joint ven­ture with an­other Cana­dian cannabis pro­ducer, HEXO, to make non­al­co­holic, cannabis-infused bev­er­ages for the Cana­dian mar­ket. Euro­pean brewer Heineken NV’s La­gu­ni­tas brand is selling cannabis-infused sparkling wa­ter at Cal­i­for­nia dis­pen­saries.

Oth­ers have passed so far. Di­a­geo chief ex­ec­u­tive Ivan Menezes said in July that his com­pany is track­ing de­vel­op­ments “very closely.” Bud­weiser brewer An­heuser-Busch InBev noted in a state­ment that it is “closely fol­low­ing the le­gal­iza­tion trends in the cannabis in­dus­try in North Amer­ica.”

The big con­cern for the al­co­hol in­dus­try is that, if peo­ple con­sume more mar­i­juana as le­gal­iza­tion pro­lif­er­ates, they will im­bibe less. Ever­core ISI an­a­lyst Robert Ot­ten­stein wor­ries that AB InBev is mak­ing a mis­take

and that, if it doesn’t craft a plan to sell cannabis-infused bev­er­ages in Canada soon, it will miss an op­por­tu­nity to make back the money it may lose on beer sales as le­gal­iza­tion takes hold.

The prob­lem would be com­pounded if le­gal­iza­tion ef­forts in the far more pop­u­lous U.S. con­tinue to gain mo­men­tum. In a Gallup sur­vey last year, 64 per cent of re­spon­dents said that they fa­vored mak­ing mar­i­juana use le­gal. That com­pared to 46 per cent in 2010 and 31 per cent in 2000.

There is dis­agree­ment over whether in­creased mar­i­juana spend­ing among con­sumers ac­tu­ally does lead them to cut back on drink­ing. On Con­stel­la­tion’s earn­ings call this month,

chief ex­ec­u­tive Robert Sands said, “We see no ev­i­dence what­so­ever, es­pe­cially in the United States, in the le­gal states, of al­co­hol can­ni­bal­iza­tion.”

But a grow­ing body of re­search sug­gests oth­er­wise and that the drop in spend­ing on al­co­hol could turn out to be quite large. A re­cent pa­per from econ­o­mists Keaton Miller and Boy­oung Seo found that the le­gal­iza­tion of mar­i­juana in Wash­ing­ton state in 2014 led to a 12% de­cline in al­co­hol de­mand. Sim­i­larly, when econ­o­mists Michele Bag­gio, Al­berto Chong, and Sun­goh Kwon looked at store-level sales data across U.S. coun­ties from 2006 to 2015, they found that, in states where med­i­cal mar­i­juana was le­gal­ized, monthly al­co­hol

sales were re­duced by 12.4 per cent rel­a­tive to sales in other states.

Cowen an­a­lyst Vivien Azer sur­mises that Con­stel­la­tion may be bet­ter shielded from cannabis be­cause of its ex­po­sure to His­panic and fe­male con­sumers— two groups for which cannabis adop­tion has been slower. But she also thinks cannabis ul­ti­mately poses a threat to Con­stel­la­tion’s beer sales and that the com­pany’s in­vest­ment in Canopy will shield it.

On the other hand, just be­cause com­pa­nies like Con­stel­la­tion and Mol­son Coors are hedg­ing their bets doesn’t mean that their cannabis in­vest­ments will pay off. Even if the U.S. does move to­ward full le­gal­iza­tion, the in­dus­try faces a thicket of reg­u­la­tory is­sues as ju­ris­dic­tions across the coun­try weigh ev­ery­thing from dis­tri­bu­tion laws to wa­ter rights. It also is lit­er­ally selling a prod­uct that grows like a weed. How far pot prices might fall with le­gal­iza­tion, and how com­pressed profit mar­gins might be­come, is an­other un­known.

Nor does any­body know who the even­tual win­ners will be. Mar­i­juana isn’t es­pe­cially com­pli­cated to grow. Nei­ther new en­trants nor do-it-your­selfers face sig­nif­i­cant bar­ri­ers.

The ul­ti­mate risk to al­co­hol pro­duc­ers is that, re­gard­less of whether they opt to put money into cannabis or stay away, they could end up los­ing money.


Corona brewer Con­stel­la­tion Brands has in­jected about $4 bil­lion into Cana­dian cannabis com­pany Canopy Growth.

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