Constellation Brands says the investment and relationship with Canopy Growth is consistent with its ‘long-term strategy to identify, meet and stay ahead of evolving consumer trends and market dynamics, while maintaining focus on its core total beverage alcohol business’.
The companies ‘will collaborate to develop and market cannabis-based beverages that can be marketed as adult-use products in markets where and when such products are federally legal,’ with Constellation emphasizing that it will not sell in any markets ‘unless or until it is legally permissible to do so at all government levels”.
As part of the deal, Constellation will also provide support in consumer analytics, market trending, marketing and brand development to Canopy Growth.
An emerging market: Understanding the regulatory & economic landscape
Founded in 2014, Canopy Growth was one of the earliest commercial players in Canada’s legal cannabis market.
The company is currently traded on the Toronto Stock Exchange (TSX) under the symbol “WEED” and has a market cap of more than C$2bn ($1.56bn).
The company owns a collection of brands serving customers in Canada and international markets where medicinal cannabis products are legal. It operates numerous production facilities with more than half a million square feet of GMP-certified indoor and greenhouse production capacity.
As part of the deal, the agreement will see Constellation and Canopy exchange knowledge and expertise.
Marijuana regulation
In Canada, medical use of marijuana is permitted, but the government plans to permit recreational use of marijuana by July 2018.
In the US, several states have legalized marijuana for medicinal or recreational use. From January, California will start issuing licences for businesses to legally sell marijuana for recreational use.
“Canopy Growth has a seasoned leadership team that understands the legal, regulatory and economic landscape for an emerging market that is predicted to become a significant consumer category in the future,” said Constellation Brands President & CEO, Rob Sands.
“Our company’s success is the result of our focus on identifying early stage consumer trends, and this is another step in that direction.”
Investment marks change in attitudes
As legislation around cannabis continues to loosen, one concern for the alcohol industry is that people may migrate towards marijuana and away from alcohol beverages, according to Euromonitor analyst Spiros Malandrakis.
Beer could be most affected, given that it often appeals to a similar demographic.
The alcohol industry therefore faces the choice of fighting or embracing the marijuana industry: and Malandrakis describes Constellation's investment as a 'symbiotic alternative to big alcohol's traditionalist conservatism and knee-jerk antagonistic positioning' against the cannabis industry.
The question is whether Constellation's investment could herald a sea change in industry attitudes.
“The marijuana industry could fuel alcohol’s next growth cycle or instead suffocate an industry already on the defensive," said Malandrakis. "The cannabis revolution is in full swing while the alcohol industry appears to be largely sitting on the fence, drink in hand, occasionally throwing crumpled cans in the general direction of the on-going legalisation debate.
"Visibly intimidated, insular and inherently conservative, large parts of the alcohol industry acknowledge and highlight the dangers to their penetration rates and profitability, but largely fail to see the huge potential behind the plumes of hazy smoke.
"Fighting the surging green tide will hence become an expensive exercise in futility. Ignoring it will guarantee the belated, panicky, knee-jerk reactions that greeted the craft juggernaut once it had already established offensive positions at the macro brewers’ gates. Cannabis can indeed cross-pollinate and, ultimately, become the fertiliser for radical innovation and experimentation.
"While cannabis decriminalisation and legalisation initiatives are currently primarily focused on the US and Canada markets, their relevance will be global through setting up regulatory frameworks, providing branding, positioning and distribution benchmarks, and spearheading innovation. The core strategic role of the North American market for alcohol only further underscores the importance of such developments for both industries."
2018 will be year of 'unprecedented growth'
Canopy Growth chairman and CEO Bruce Linton says that 2018 will be a year of ‘unprecedented growth’ in medical and adult-use opportunities.
“This strategic investment is a sign of confidence in Canopy Growth's reliable track record and vision for responsible yet aggressive market expansion as the world's leading cannabis company,” he said.
"In Constellation we have a strategic ally that will join us as we lead the global cannabis sector into the future. We have also strengthened our balance sheet to fund the ambitious expansion efforts we have planned heading into 2018.”
The transaction is expected to close during Constellation Brands’ third quarter of fiscal 2018.