This week's news was dominated with the rumour that Coca-Cola was in advanced talks with Aurora Cannabis to create a line of cannabis-infused beverages. As you can imagine, this made global headlines. I have received numerous emails, texts and messages this week from our members, alerting me to this story and asking, "Is this real? Should I buy Aurora?"
Coca-Cola (NYSE:KO) is the world's largest beverage supplier with an unrivaled global distribution network. Aurora Cannabis (TSE:ACB) is the world's second largest cannabis company behind Canopy Growth (NYSE: CGC) who recently got a $4bn investment from Constellation Brands.
Insiders close to the brands revealed the beverages would target the wellness/recovery markets, with a drink containing non-psychoactive (read – won't make you high) CBD.
One of the fastest growing areas of the cannabis industry. CBD (or Cannabidiol) is a compound found in the cannabis plant that has been shown to reduce stress and anxiety and has anti-inflammatory, anti-nausea, and anti-seizure properties. Basically, it's the new buzzword in the healthcare industry. And it's not just limited to the doctors.
CBD is now starting to gain popularity in everyday products such as coffee and juice, with the swankiest health bars promoting it on the streets of LA. It grew nearly 40% in 2017, reaching $367 million in sales across both hemp-derived and marijuana-derived markets.
For the first time in 2017, U.S. hemp-derived CBD products outsold marijuana-derived CBD products. Recent studies predict it will be a $2bn market by 2020.
As I have mentioned before. The best way to understand hemp and marijuana is as follows. Hemp and Marijuana are to cannabis, as organise and lemons are to citrus. Both Hemp and Marijuana produce CBD, with the main difference being, the Hemp plant produces non-psychoactive CBD (as it contains almost no THC).
It is the marijuana plant that contains the THC and hence you end up with two types of CBD. CBD that can also allow you to get high (or feel a buzz) and CBD that (no matter how much of it you consume) cannot make you high.
And here's where a perfect storm is brewing. You have one of the fastest growing trends on the planet (CBD consumption) meeting a changing legislative environment where Hemp is about to be rescheduled and permitted to be produced (on mass) for commercial use.
Senate Majority Leader – Mitch McConnel – introduce the Hemp Farming Bill of 2018 to the Senate earlier in the year. The Bill, if passed, would reschedule Hemp to allow for industrial-scale production. With one signature from the President, a booming hemp industry will be born.
This is game-changing. The global industrial hemp market size is expected to reach $10.6bn by 2025, according to US-based market research and consulting company Grand View Research.
Very coincidentally, Aurora recently made two acquisitions in the Hemp space. It's hard to keep up with the number of acquisitions that Aurora makes, however, these two fit perfectly with this leaked rumour. They recently acquired 2 European Hemp players, Agropro UAB and Borela UAB for a combined total of $14.9m. Between the two of them, they now have over 1600 Hectors of farming capacity which should yield up to a 1,000,000 kgs of Hemp per annum.
Aurora has a significant stake in Radiant Extraction Technologies, allowing them to extract higher yields of non-psychoactive CBD in a much faster timeframe (tick extraction), and they have a 52.9% stake in Hempco Food and Fibre (and tick distribution). Pure coincidence? Or the fact that the rumours now make even more sense (given they would likely have been talking with Coke for well over a year)
The company that once counted Cocaine as one its ingredients, certainly needs to be looking, once again, to drugs to aid it's falling revenues. Carbonated soda drinks make up 75% of their revenues and this is even more significant when you consider that the global soda industry is shrinking, rapidly.
According to a beverage market report, soft drink sales worldwide are on the decline as consumers increasingly opt for healthier choices over sugary drinks. In North America, the 2017 soft drink market fell to US$76.4 billion from US$78.3 billion in 2016.
For Coke, last year's negative top-line growth would have been one of the larger driving forces behind their purchase of Costa Coffee Chain for $7bn (the largest amount they've ever spent on an acquisition).
The soda industry is under real pressure with a report recently issued suggesting the cannabis alone could outsell soft drinks by 2030. There is no doubt that Coca-Cola needs to protect their market position and revenues. The CBD market may well be their best shot at this. More on this later.
This one's different
The Canopy-Constellation II deal announced in mid-August lit a flame under the Cannabis stock markets. The markets have been in hyperbolic growth ever since this. And it was a deal that should have woken the markets. It was the biggest deal ever announced in the marijuana industry, and it was a deal that was all about one thing. The USA.
Constellation gave Canopy the war chest they needed to enter the US market – when it is legally ready to do so. They have the money now to take advantage of what is the biggest consumer market in the world.
But there is a difference. The alcohol companies are joining the greenrush for a different reason. Substitution. Cannabis is the number one threat to the alcohol industry. People who have a choice are now purchasing cannabis in much larger quantities than alcohol. Last year, in Aspen Colorado, cannabis sales outpaced alcohol for the very first time.
Big alcohol understands that they need to get into the market to protect their market share and take advantage of a new vertical. And they're all going after the same thing. THC CBD infused beverages. In other words, a beverage that has health benefits (it has CBD in it) but will give the user a nice buzz (as a result of the THC in the drink). This is now a substitute product for their alcohol brands. And Canada is the best possible testing ground for them.
This is why we have seen MolsonCoors come into the industry and Heineken develop CBD infused beer. They get to test products in the Canadian market and have the time to refine them prior to launching into the US market (when it eventually comes online)
Back to the Wellness Market
Think about this. The CBD market is predicted to reach at least $2bn by 2020 (in the US alone). The Hemp Farming Bill is about to be signed off allowing for the full-scale industrial production of CBD-rich, hemp. There's is a growing market for "health and wellness" products and coke would be perfectly positioned to take advantage of it. Think about it.
They already have the best retail coverage and distribution across the US. They are heavily capitalised, and would be able to bring CBD infused beverages to the market quickly. Very quickly. They don't have to wait for legislation like the Canadian backed players do…hemp is legal and hence they're operating in a federally legal environment.
No other beverage company is actively targeting a consumer base that is wanting a cannabis-infused drink, and not wanting it to take the edge off. The Coca-Cola consumer is the modern day health-conscious person looking to gain the health benefits of the next wonder ingredient. Acai berries anyone?
Except this time it's different. This time it's real. This is CBD, and efficacy based results are proving its impact on areas such as pain, stress, and anxiety. And this is why, it is seen by many, to be the fastest growing area of the industry.
Does it make sense?
Look, let's face it. If it happens, it's very cool. It brings an A-class, celebrity style brand to the table. It brings further legitimacy to the cannabis industry and is making the business of growing and selling cannabis, big business.
For Coke, the largest line of commercially produced recovery drinks brings the worlds #1 global distribution network a new product channel and in doing so, subsidies their negative growth in soda. For Aurora, it's a no-brainer. Distribution – check. Capital – check. Status…check, check.
So, back to the rumour. Look, this is certainly not the first time a deal involving Aurora as leaked to the market. Anyone remember Newstrike? And even more recently, their desire to acquire Australian based Cann Group (that didn't go through). Even though both companies declined to comment saying that they do not normally disclose "discussions" they both stated in black and white their intention to focus on the CBD wellness industry.
I have always stated that in the wide world of Cannabis, investors buy the rumour and sell the news. So should you buy the rumour in this case? We are, big time.