Companies Call “Dibs!” on Two Booming Pot Segments
We’re inching closer to those all-important retail sales in Canada starting October 17.
And the race is on for dominance and market share.
Provinces are sending stocks higher – or lower – as their liquor and cannabis bureaus award the initial supply agreements.
And companies are planting flags as they lay claim to their corners of the market.
Recently, two large players called “dibs” on two of the hottest growth segments…
One “Tweed and Tonic,” Please
Last year, Eaze released a study that was a wake-up call for the alcohol and cannabis industries. Using data from a quarter of a million California cannabis consumers, it found that pot consumers drank less alcohol. In some cases, they stopped drinking it altogether…
In California, legal weed sales are expected to top $5 billion in 2019. That’s equivalent to its beer sales.
And companies are leaning into this trend, not shying away from it.
Canopy Growth Corp. (NYSE: CGC) CEO Bruce Linton publicly stated the company is creating an all-new beverage category.
On CNBC’s Mad Money, Linton let it fly that consumers were soon going to be able to walk into a bar and order a “Tweed and Tonic.”
Tweed is Canopy’s marquee brand – and arguably the most recognizable cannabis brand in the world.
In the second half of 2019, cannabis-infused beverages and edibles will hit shelves in Canada. And Canopy is ready. The company is poised to unleash a flurry of beverages never seen before.
Of course, this all goes back to late 2017 when alcohol powerhouse Constellation Brands (NYSE: STZ) acquired a 9.9% stake in Canopy. The duo has had a significant head start in making cannabis-infused beverages.
Even though Constellation is recognized as the distributor of Corona, Modelo and Pacifico beers, I wouldn’t expect to see those cannabis-infused.
But Constellation also owns Svedka vodka, Casa Noble Tequila, High West whiskey and Paul Masson brandy.
So cannabis-infused spirits are more likely to make an appearance, especially considering Linton’s “Tweed and Tonic” comment.
With that, Canopy has thrown down the gauntlet in the beverage category.
Still, I’d pay close attention to Molson Coors’ (NYSE: TAP) second quarter conference call on August 1. As I’ve covered here before, the brewer is on the hunt for a producer to partner with. And on that earnings call, we could hear if any headway has been made.
Just Roll With It
There are a lot of age-old skills that people in the modern world no longer want to master.
Rolling joints is one of them.
And this is where Aurora Cannabis (TSX: ACB; OTC: ACBFF) is making waves.
The new entity will be 40.5% owned by Aurora and 59.5% owned by Wagner Dimas. Aurora will be granted exclusive licenses to the pre-roll technology under certain conditions.
Now, Wagner Dimas has developed machines that form 75 different varieties of pre-rolls and cones.
With adult use of cannabis now legalized, its business is booming.
In 2017, Wagner Dimas produced 5 million pre-rolls. This year, it’s on pace to produce 10 times that. In fact, the company is expected to produce 50 million pre-rolls in California alone in 2018. That’s a pre-roll for every citizen in the state… and then some.
The new joint entity between Aurora and Wagner Dimas is expected to produce 100,000 pre-rolls per day… enough to meet Canadian consumer demand when recreational sales go live in October.
This is key.
We already know what the data says: Dried flower is falling to the wayside and pre-rolls are becoming more popular.
And Canadian producers are looking at the U.S. state-level recreational market trends for clues of what to expect come October.
If you take the hot pre-roll market and combine it with the dominating concentrates, extracts and oils market, it’s the perfect recipe for an explosion. Concentrate-infused pre-rolls are skyrocketing in demand. In Washington, sales increased 103%. In California, they already represent 28% of the pre-roll market.
So Aurora is staking its claim here.
Investors must remember that Canadian producers aren’t blindly heading into the launch of adult-use sales. There are years of recreational market trend data from individual U.S. states to pull from.
I’ve previously written about how dried flower’s market share typically plummets after another category is legalized. Initially, dried flower might account for as much as 70% of the market. But in Colorado and Oregon, it now accounts for just 44%.
In California – where the adult-use market launched in January – flower accounted for just 40% of sales in April. Concentrates now account for 31%.
Consumers who are green to the new marijuana markets aren’t looking for a harsh introduction.
They want to ease their way in.
That means oils and concentrates… and “Tweed and Tonics.”
At the same time, more and more consumers are willing to pay a higher price for pre-rolls… and even double that for concentrate-infused pre-rolls.
Few consumers want to waste their time with papers and buds. The modern marijuana consumer has more important things to do.
We’ll watch as more companies start to plant their flags in this new land of opportunity.
For investors, it’s an opportunity to strategically build up our portfolios.
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