By 2025 the global alcoholic beverages market is expected to reach $1,684 billion in value.
According to a report by Allied Market Research, while beer is still expected to maintain a dominant share of the global market, distilled spirits have been predicted to grow at a much at a much faster rate due to high demand for premium brands.
One of the researchers who worked on the study, Eswara Prasad, said that the demand for distilled spirits is relatively high, "owing to the shift towards high-grade spirit variants".
"Higher consumption of hybrid, mixed, and flavoured spirits is expected in the near future, due to the downward trend of beer market," she said.
And the global cannabis industry isn't far behind. A study conducted by Grand View Research last year found that legal marijuana market is expected to exceed $146 million by 2025, thanks to its' growing adoption within the medical community.
So, it's hardly surprising that several companies are already trying to merge the two markets with a game changing new product: cannabis-infused beer.
Down the Hatch
In August 2018, the Canadian branch of Molson Coors Brewing signed an agreement with Quebec-based marijuana company HEXO Corp (NYSEMKT:HEXO) to research and develop a line of cannabis-infused beer. As part of the deal Molson Coors will retain a 57.5 percent stake in the joint venture, with HEXO controlling the remaining 42.5 percent.
The president of Molson Coors, Mark Hunter, said the company believes that a sizeable market will evolve over time, that could eventually be worth over $1 billion in Canada alone.
"Clearly, there are lots of numbers which are being bandied around with regard to the potential size of the cannabis market in Canada," Hunter said.
"I think, if you take an average, then it suggests that this market may be somewhere between $7bn and $10bn in market value, with beverages somewhere between 20% and 30%. And that's obviously non-alcoholic cannabis-infused beverages. Even if you take the low end of that estimate, then it suggests that the beverages segment could be circa $1.5bn of value."
"If you look at the strength of our go-to-market in Canada, if you look at our understanding of Canadian consumers and our understanding of brand-building in Canada and the capability that we have through our partner in HEXO, we believe that we're well-placed to be ready to take a meaningful share of that [cannabis beverage] segment when it's legislated for and opens up in the fall of 2019."
The project is expected to help reverse Molson Coors' declining share of beer market, which has been on a gradual downward spiral for much of the last decade. The company predicts that the product's eventual launch will draw considerable consumer interest due to the growing popularity of craft beer and hemp-based food.
The CEO of Molson Coors Canada, Frederic Landtmeters, was bullish about the agreement, calling the deal an exciting chance to make a push into the cannabis industry.
"Canada is breaking new ground in the cannabis sector and, as one of the country's leading beverage companies, Molson Coors Canada has a unique opportunity to participate in this exciting and rapidly expanding consumer segment," Landtmeters said.
"While we remain a beer business at our core, we are excited to create a separate new venture with a trusted partner that will be a market leader in offering Canadian consumers new experiences with quality, reliable and consistent non-alcoholic, cannabis-infused beverages."
Even though commercial interest in cannabis beer is expected to experience strong growth, HEXO is one of the ten largest growers in Canada, so it will be well equipped to meet market demands. The company is currently undertaking a massive expansion of its' Gatineau facility, which will increase its peak production levels to 108,000 kilograms per year.
Under the terms of the agreement, HEXO is expected to provide 20,000 kilos of cannabis to Molson Coors in the first year, while the second and third years will require 35,000 and 45,000 respectively. The volume of cannabis provided to Molson Coors will continue to increase each year—based on the expectation of 10% annual industry growth—until the five-year deal is complete.
Investors in HEXO Corp have also been celebrating the new partnership, as long-term supply deals can be particularly lucrative for Canadian cannabis growers due to fierce domestic competition. The locked-in volume and pricing commitments of similar deals have proven particularly attractive to investors, as the predictable cashflow offers a semblance of stability in an industry that is still highly volatile.
HEXO's partnership with Molson Coors will also allow it to gain exposure to the highly lucrative "alternative cannabis product" market, which includes marijuana or hemp-based concentrates, vaporized cartridges, oils, infused creams and lotions, infused beverages, and edibles.
Alternative cannabis products tend to offer significantly higher price points than the plant itself, and are also commoditization-resistant. As a result, growers that choose to focus on this market will experience wider margins and substantially less pricing pressure than those who stick to solely cultivating cannabis.
Hopping on the Bandwagon
However, while HEXO and Molson Coors' are only just gearing up to take on the cannabis beverages market, Dutch beer giant Heineken already has a product line hitting shelves.
Craft brewer Lagunitas—which is a wholly owned subsidiary of Heineken—have already launched a line of "IPA-inspired" calorie-free sparkling water called Hi-Fi Hops, as well as a SuperCritical ale, which was made with cannabis terpenes.
According to the head brewer for Lagunitas, Jeremy Marshall, the company had been planning to pursue the development of a cannabis-based beer for some time.
"We often dream of hops and their cannabis cousin partying together at their family reunion and wanted to bring this party to life in a drink," Marshall said.
"We believe it's high-time that good beer inspired a provocative yet refreshing tasting non-alcoholic alternative – bubbly, aromatic, bitter, fruity and herbaceous with no gluten, no carbohydrates and a smidge of California sun-grown cannabis in every sip."
Hi-Fi Hops are currently available in two different varieties—one with 10 mg of THC, and one with 5 mg of THC and 5 mg of CBD—and are the result of collaboration with cannabis-based products manufacturer AbsoluteXtracts.
The CEO of Lagunitas, Maria Stipp, views the joint venture as an important move to ensure the company remains relevant in the evolving alcoholic beverage market.
"Hi-Fi Hops is not the first chapter in the love affair between cannabis and Lagunitas, but it is one of the most exciting," Stipp said.
"The idea of being part of a no-calorie beverage infused with cannabis seemed like a perfect next step in our product innovation, and a natural way to marry our past with our future."
This view echoes similar sentiments found in Euromonitor's 2019 "Here Comes Cannabis" report, which found that "cannabis will ultimately culminate a global paradigm shift that will radically disrupt traditionalist industries such as alcoholic drinks".
"Reshaping millennia-old drinking rituals and providing an alternative to social lubrication occasions, cannabis should be either embraced as a symbiotic opportunity or faced as a potentially detrimental antagonist for an alcohol industry already on the defensive" the report said.
Make it a Double
Another company making big waves in the cannabis-infused beer space is the Canadian marijuana producer Canopy Growth (NYSE:CGC). The cultivator drew significant attention last year after it received a $4 billion investment from Constellation Brands, a leading international alcohol manufacturer.
As part of the deal, Constellation Brands—which also holds Corona beer, Svedka vodka, and Casa Noble Tequila in its' portfolio—will increase its' stake in Canopy Growth from 10 to 38 percent by purchasing 104.5 million shares.
Constellation's record-breaking investment in Canopy is currently the largest known deal in the cannabis industry, and is an obvious indicator of where the company assumes that future market growth will be. The CEO of Constellation Brands, Rob Sand, has confirmed that the company expects cannabis beer to be an increasingly popular market as time passes.
"As the leader in the total beverage alcohol space, we look forward to reaping the benefits of our cannabis investment, which we see as incremental to our core beer, wine and spirits portfolio" Sands said.
"Over the past year, we've come to better understand the cannabis market, the tremendous growth opportunity it presents, and Canopy's market-leading capabilities in this space. We look forward to supporting Canopy as they extend their recognized global leadership position in the medical and recreational cannabis space."
When news of the deal broke in 2018 it caused Canopy Growth stock to spike in value, jumping up by thirty percent to $41.68 a share.
The CEO of Canopy, Bruce Linton, called the investment "rocket fuel" that would allow the company "to be way more global".
"Our business can now make the strategic investments required to accelerate our market position globally."
"Constellation's concentration of global cannabis activities exclusively through Canopy, coupled with the investment and its expert capabilities in brand-building, marketing, consumer insights and M&A will be a huge benefit as we look to expand our portfolio in Canada, the United States and emerging cannabis markets around the globe."
"We view this investment in our business as an endorsement of our execution since forming our initial strategic relationship in October 2017," Linton said.
Weed Be Good Together
Although marijuana and beer may seem like strange bedfellows, in reality, they're a perfect marriage. Cannabis-infused beverages might even represent the alcohol industry's best chance to avoid losing further market share thanks to declining beer sales.
According to new research published by Georgia State University, alcohol sales have been observed to drop by up to 15 percent in areas where medical marijuana laws have been passed. The study's co-author, Alberto Chong, said that the decline was observed even when correcting for demographic or economic factors such as age, gender, median household income, and unemployment rates.
"Our findings clearly show that these two substances act as strong substitutes in the marketplace"
– Alberto Chong
"This implies that rather than exacerbating the consequences of alcohol consumption—such as an increase in addiction, car accidents or disease risk—legalising cannabis may temper them."
With companies like Heineken, Constellation Brands, and Molson Coors all competing for the same distribution channels, it's still unclear which one will emerge as the eventual brand leader.
Luckily for pot stock investors, cultivators such as Canopy Growth and HEXO Corp are set to benefit regardless of which company wins the race to market saturation.
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