Yahoo Finance Coca-Cola's Interest in Marijuana Has Fizzled Out
The marijuana industry has truly budded in 2018. It's been a year in which we've witnessed numerous marijuana firsts, including the most important event of all: Canada becoming the first industrialized country in the world to legalize recreational marijuana. The cannabis industry has gained legitimacy this year, and the expectation is that billions of dollars will begin flowing into legal channels through the remainder of this year and beyond.
Investors have clearly taken note of this opportunity to make some green of their own. Although it's been an exceptionally volatile industry, which is to be expected given that there's no precedent for an industrialized country legalizing adult-use weed, marijuana stocks have been the top-performing industry since the beginning of 2016.
Image source: Getty Images.
Brand-name businesses turn to cannabis for growth
Of course, it isn't just investors that've taken notice. Brand-name companies in the beverage, tobacco, and pharmaceutical industries have been looking for ways to boost their own potentially stagnant sales growth by partnering or investing in the cannabis industry.
On Aug. 1, Molson Coors Brewing Co. (NYSE: TAP) announced a joint venture with Quebec-based HEXO Corp. (NASDAQOTH: HYYDF) to develop a line of cannabidiol-infused beverages. Cannabidiol, or CBD, is the nonpsychoactive cannabinoid best known for its perceived medical benefits. Molson Coors has seen years of declining sales and market share in Canada, and HEXO, though possibly a top-10 producer by aggregate volume at 108,000 kilograms in estimated peak yield, is looking to make a name for itself in an otherwise crowded field of growers. Then again, both Molson Coors and HEXO will need to be patient, as CBD-infused beverages, along with vapes, concentrates, and edibles, aren't yet legal in Canada.
Constellation Brands (NYSE: STZ) also bit on the cannabis craze -- and more than once, might I add. Just two weeks after Molson Coors forged its deal with HEXO, the Corona and Modelo beer maker announced its intent to invest $3.8 billion in Canopy Growth Corporation. This marked the company's third investment in Canopy Growth and should bring its stake up to 38%. In addition to product development, which will almost certainly include CBD-infused beverages, Constellation Brands will help Canopy Growth enter new foreign markets.
Pharmaceutical companies have gotten in on the action, too. Novartis' generic-drug subsidiary Sandoz announced a strategic partnership with Tilray back in March to sell co-branded products in pharmacies and hospitals throughout Canada, as well as to collaborate on research and development of cannabinoid-based products.
In other words, brand-name companies see plenty of potential in the burgeoning pot industry.
Well... most brand-name companies, at least.
Image source: Coca-Cola.
Coca-Cola's interest in CBD-infused beverages fizzles out
On Tuesday, global beverage powerhouse Coca-Cola (NYSE: KO) reported its third-quarter operating results, and among the many things that management touched on was the company's interest in the cannabis space.
For those who may not recall, Coca-Cola made headlines in September when BNN Bloomberg reported that the company was in talks with Aurora Cannabis (NYSE: ACB) about potentially teaming up and/or making an investment. A deal would certainly have seemed to make sense. Aurora Cannabis is projected to be the largest producer by annual yield -- 570,000 kilograms, per the company, although this should head higher with its ongoing acquisition of ICC Labs -- and has its footprint in more than a dozen foreign countries. In short, Aurora Cannabis appeared to have an inside track to snagging a partner of Coca-Cola's caliber.
But Coca-Cola closed that door this past Tuesday. During the company's conference call, CEO James Quincey told analysts that "We've got no plans in the cannabis or marijuana or CBD space at this moment. I don't see that as something that we'll be getting into anytime soon. It's just not something we're interested in."
Ouch! Not only did Coca-Cola step on near-term rumors of partnering up with Aurora Cannabis, but it poured water on what had been a red-hot industry.
Image source: Getty Images.
Here's why Coca-Cola suddenly has cold feet
So, why the sudden about-face from Coca-Cola?
One possible reason is the time it'll take for the industry to get up to speed. It took mere hours for some regions of Canada to run into product shortages (looking at you, Manitoba), which means it could be multiple quarters before pot companies would be able to devote their attention to CBD-infused beverages. If marijuana companies can't produce what a company like Coca-Cola needs, there's little incentive to make a deal.
Second, Coca-Cola may not be enamored with the Canadian market. Even though legalization is expected to bring in upwards of $5 billion in added annual sales, there are other markets that would be considerably larger if cannabis became legal in them. Perhaps if the U.S. were to change its tune on cannabis, Coca-Cola would dip its toes in the pond, so to speak. Until that time, there may not be enough financial incentive to get Coca-Cola involved.
Last, there's also the possibility that Coke felt marijuana stocks were grossly overvalued. After all, history has shown that all next-big-thing ideas have eventually deflated prior to industry maturation over the past quarter century. If Coca-Cola were to invest in Aurora Cannabis, it probably would have had to pay a premium. Had it paid, say, a 20% premium in mid-September, it'd be down nearly 50% on its investment.
Whatever the reason(s) may be, it's time to cross Coca-Cola off your list as a possible investor or partner in the cannabis space.
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Sean Williams has no position in any of the stocks mentioned. The Motley Fool owns shares of Molson Coors Brewing. The Motley Fool recommends Constellation Brands and Hexo. The Motley Fool has a disclosure policy.
