Are Big Alcohol Partnerships a Threat to Cannabis Stocks?

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Big Alcohol: Boon or Curse for Small Marijuana Stocks?

Recently, a top marijuana CEO sat down with me to talk about the future of the business. In our little chat, he said something very interesting, namely, that cannabis “is not a commodity business; it’s a CPG business.” (CPG stands for consumer packaged goods.)

A minute passed before that idea settled in my head.

Once it clicked, everything became clear. I suddenly understood why big alcohol companies like Constellation Brands, Inc. (NYSE:STZ.B) and Great North Distributors (a subsidiary of Southern Glazer’s Wine and Spirits, LLC) are making marijuana industry acquisitions.

Before we get to these details, we should ask: Are these companies a threat to marijuana stocks?

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Personally, I don’t think so. Cannabis firms can always reject takeover attempts if the offer price is too low. And we haven’t seen any indications of big alcohol companies starting their own marijuana subsidiaries, so I’d say this is a positive trend.

It’s a win for pot growers that gain access to intellectual capital and additional investments. And it’s a win for alcohol companies that realize cannabis is more—a lot more—than just a plant.

If you’re confused, look at mega-brands like “Colgate” or “Brawny” or “Dove.” Why do people continue to buy them instead of generic alternatives? Is it superior quality? Or is it something else entirely?

“Branding” is the answer.

When Dove launched in the U.S. in 2002, it came armed with a $110.0-million advertising campaign. The next year it added another $50.0 million to the budget. (Source: “Dove: advertising & marketing profile,” AdBrands.net, last accessed May 30, 2018.)

Colgate is no different. It spent roughly $369.0 million on advertising in the fourth quarter of 2017. And while that may seem like a lot, remember that branding single-handedly turned Colgate-Palmolive Company (NYSE:CL) into a $54.7-billion behemoth.

Chart courtesy of StockCharts.com

Marijuana companies are in the same boat, because growing marijuana plants requires little to no talent, which means that, in order to capture a significant market share, companies will need to treat their product like toothpaste or toilet paper.

Is This a Good Thing?

Let’s say you accept my premise. What’s next?

The obvious answer is to find out who wins from this trend, and why. If marijuana stocks are being snatched up at earlier phases in their growth cycles, it seems like retail investors could miss out on enormous growth opportunities.

On the other hand, this could present an opportunity for investing in big alcohol companies, given that they’re gaining exposure to the fast-growing cannabis market. It all depends, as they say, on the details.

Two examples come to mind: 1) Constellation Brands investing in Canopy Growth Corp (NYSE:CGC, TSE:WEED); and 2) Aphria Inc’s (OTCMKTS:APHQF, TSE:APH) partnership with Great North Distributors.

Canopy-Constellation Brands

Anyone unfamiliar with Constellation Brands should take a peek inside the nearest pub. Chances are you’ll see “Corona,” “Modelo,” or “Svedka,” three brands that transformed Constellation into a $42.6-billion company through the subtle arts of CPG branding.

You’ve seen the Corona ads. A beautiful woman is sitting alone on a beach when a football lands nearby. Running along to pick it up is a young alpha male who, after throwing the ball, flashes her a grin brimming with expectation. She gives an ironic, uninterested wave. He runs off.

Meanwhile, her friend—who’s equally stunning of course, because all attractive women travel in pairs—arrives carrying a bucket of Coronas on ice, lime wedges and all. Footballs begin raining in from all sides. End scene.

By the end of the commercial, you’re so interested in the ad that you forget what it’s about. Is it about men and women? Of course not. It’s about connecting Corona with beach weather, so the next time it’s a beautiful summer day you think about drinking a cold one.

Unfortunately, Canopy Growth is not fully leveraging Constellation’s marketing savvy. They simply took an endorsement via investment, a 9.9% minority stake for about $191.0 million.

Why did Constellation Brands make the investment? According to Vivien Azer from Cowen Inc., it’s because “Consumer survey work suggests [about] 80% of consumers reduce their alcohol consumption with cannabis in the mix.” (Source: “The Company Behind Corona Beer Just Bought Into the Marijuana Business,” Fortune, October 30, 2017.)

In other words, Constellation recognizes marijuana as a threat. But rather than waiting patiently for risk to manifest itself, the company is actively hedging its bets.

Aphria-Great North Distributors

Aphria’s partnership with Great North Distributors is much more hands-on. According to the deal, Great North will have exclusive distribution rights for Aphria’s products.

From Aphria’s perspective, the agreement provides them an “unparalleled sales network” and an ability to “hit the ground running from the very first day of legal adult-use sales.” (Source: “Aphria selects Great North Distributors, a Canadian subsidiary of Southern Glazer’s Wine & Spirits, for Canada-wide distribution of adult-use cannabis,” Cision, May 17, 2018.)

Doug Wieland, Executive Vice President and General Manager of Southern Glazer’s Wine & Spirits Canada, commented on the groundbreaking deal, saying: “Our decision to become the first beverage alcohol distributor to facilitate the legal distribution of cannabis in Canada reinforces our innovative, first-mover position in the industry.”

Analyst Take

I think that Canopy Growth and Aphria will both benefit from their association with big alcohol companies. It would be hard to argue the opposite.

Not only did Canopy gain a cash infusion and a rubber stamp on its brand from its deal with Constellation, it possibly foreshadows a giant merger down the road.

Meanwhile, Aphria got rid of distribution headaches by simply outsourcing those tasks.

Overall, there’s no denying that big alcohol companies and emerging weed stocks are playing the same game. We will continue to monitor the market for more signs of collaboration and possible merger opportunities.