Will Big Booze succeed in becoming Big Buzz?
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Earlier this month, Constellation Brands, maker of Corona, Svedka, and Robert Mondavi wines, invested $4 billion in the largest pot corporation in the world, by market cap. The deal expands Constellation’s ownership stake in Canadian Canopy Growth Corp from 9.9 percent to 38 percent and includes warrants to eventually own over 50 percent.
“To see one company getting $4 billion, it’s historic,” says Morgan Paxhia, co-founder of Poseidon Asset Management, a cannabis hedge fund. “It certainly is symbolic of the alcohol industry’s interest in the space.”
While this is the largest-ever investment in legal weed, Constellation is not the first alcohol company to lay claim on cannabis. On August 1st, Molson Coors announced a new joint venture with The Hydropothecary Corporation to produce non-alcoholic cannabis-infused drinks for the Canadian market, and Diageo, the maker of Smirnoff and Guinness, is in discussion with three cannabis companies about doing the same. In the U.S., Heineken-owned Lagunitas Brewing Co. plans to introduce a cannabis-infused sparkling water in California, and the founder of Blue Moon will launch a similar product in Colorado.
Big Alcohol wants to get in early on the “green rush,” and for good reason. Research firms estimate that the North American legal cannabis industry will be worth $47 billion by 2027, surpassing U.S. wine sales. Compared to other potential investors, Big Alcohol feels particularly threatened by cannabis competition, since alcohol and cannabis are more ready substitutes. But alcohol companies also have some distinct advantages in the weed market, since they are already familiar with navigating complex and diverse state-by-state regulations. While small cannabis entrepreneurs struggle to raise money, deep-pocket booze giants see an opportunity to claim a larger share of their new competition early and shape the market in their image.
As more U.S. states and Canada vote to legalize recreational cannabis, the alcohol industry stands to lose customers. A 2017 report predicted that the beer sector could lose $2 billion in sales as beer drinkers switch to legal pot, at a time when beer sales are already floundering.
Rather than compete with cannabis, Constellation’s investment solidifies Big Alcohol’s intent to join the weed market. “They’re figuring out how to participate in the industry,” says Paxhia, “they’ve got to look for ways to continue to grow businesses, and alcohol, no pun intended, has seemed like its reached a saturation point.”
To date, most alcohol companies have invested in cannabis-infused beverages, drawing on their expertise in mind-altering drinks. But Constellation’s investment goes beyond beverages; they are the first non-cannabis business to own a major stake in a leading cannabis corporation. This unprecedented move suggests that Big Booze could enter all aspects of the cannabis industry, from cultivation to processing to edibles.
Big Alcohol’s experience navigating complex state-by-state regulations may make them more willing to jump into the risky legal territory of cannabis than other investors. In many respects, they’ve been here before. “From an alcohol perspective this is very similar to what they experienced on the other side of prohibition,” explains Paxhia, “states legalize [first] … and so you end up with all this weird interstate distribution issues and regulations. But alcohol is used to that.”
By contrast, small businesses do not have the same access to capital and experience to navigate complex regulatory environments. In states like California and Washington, pre-existing and aspiring cannabis entrepreneurs are struggling to pay for costly compliance measures and heavy taxation without traditional banking or access to Small Business Administration loans.
“It’s practically impossible to transition to the regulated market,” says Hezekiah Allen, Executive Director of the California Growers Association, “without access to loans and other programs that help small businesses through these transitions, the vast majority of businesses in [California] aren’t going to make it.”
Big Booze, on the other hand, has deep pockets. As alcohol companies make more investments in cannabis, they could change the direction of the industry and determine what types of products and businesses come to market.
“We don’t have established capital markets for cannabis yet and alcohol sees that as an opportunity,” notes Paxhia, “they can be those providers of capital, but now you’re going to do business the way we want and the way we like it, it’s likely to stymie innovation.”
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