Cannabis Markets

Feasting on Profits From the “Munchies”

Weed and food.

They go hand in hand.

I once said that if investors believed in marijuana legalization, they should take a serious look at Mondelēz International (Nasdaq: MDLZ) and Yum! Brands (NYSE: YUM).

Mondelēz is the world’s largest snack food company. In a world where weed is legal, what’s not to like about a company that owns Oreo, Nutter Butter, Chips Ahoy!, Cadbury, Sour Patch Kids and a whole host of “stoner staples”?

Yum! Brands owns KFC, Pizza Hut and Taco Bell.

On the list of the 50 best foods for the “munchies,” pizza was No. 1. General Mills’ (NYSE: GIS) Totino’s Pizza Rolls (understandably) came in at No. 2.

Oreos – including Oreos dipped in Nutella, Oreos dipped in peanut butter, and peanut butter-flavored Oreos, etc. – took several spots in the top 20.

My point being… if you’re looking for a way to play legalization – without owning actual marijuana companies – food is a stable route.

As we know, appetites and tastes are evolving. Particularly in the marijuana space.

And maybe nothing highlights this more than shows like Bong Appétit, about multicourse, upscale marijuana-infused dinner parties.

Nonetheless, the investment thesis remains the same: Weed and food go hand in hand, regardless of the vehicle.

And that brings us to the current battle being waged…

There’s a Nug in My Suds

“I’m going to keep drinking,

Until I’m petrified…”

I don’t know if Hank Williams would be singing a different tune today. But beer is about to undergo a transformation.

In October, Constellation Brands (NYSE: STZ) paid out $200 million for a 9.9% stake in Canadian marijuana company Canopy Growth Corp. (TSX: WEED; OTC: TWMJF).

It’s a sign of the times.

And it’s further proof of the marriage between weed and food.

Think about it… The first major investment by a Fortune 500 company into Canada’s marijuana market wasn’t a tobacco company.

That’s what everyone was expecting.

For years, we’ve heard endless claims that Big Tobacco would absorb the marijuana industry. But nothing like that has happened.

Instead, the first large-scale investment in marijuana was by a beverage conglomerate.

That speaks volumes.

Constellation’s success in recent years has been fueled by its beer business. To me, Corona and Grupo Modelo are the only super-attractive long-term-hold beer labels in the U.S. On top of that, the beverage brand owns Svedka vodka. And we all know that it’s the No. 1 vodka of 2033.

Now, the alliance between Canopy and Constellation is all about marijuana-infused beverages. And the deal came weeks after Canada’s parliament changed its stance on edibles.

In 2019, edibles and cannabis-infused drinks will legally be sold in Canada. The timeline is a year after recreational/adult-use marijuana goes live nationwide.

And the two companies want to be at the forefront of this market.

We can’t overlook that Canopy is headquartered in a former Hershey (NYSE: HSY) chocolate factory.

Edibles are seen as a very large market opportunitypotentially even larger than recreational smoking.

In Canada, the edibles consumer base is expected to be 15 million people. That’s more than twice the size of the expected 6 million recreational marijuana users.

That’s because people are more likely to use recreational marijuana by eating infused desserts and alcoholic beverages than by smoking it.

Remember, the smoking rate among adults continues to drop.

That makes this edibles segment of the market one to watch closely.

Canopy’s competitor, Aurora Cannabis (TSX: ACB; OTC: ACBFF), is taking a different route. The company just paid $103.5 million for a 19.9% stake in Liquor Stores N.A. (TSX: LIQ; OTC: LQSIF).

Liquor Stores N.A. operates 231 retail outlets. The majority are in Canada, with a handful in the U.S.

And this investment could ultimately give Aurora control of 40% of the liquor distribution chain.

Instead of a liquor company acquiring part of Aurora, Aurora is looking to control liquor distribution.

The plan is to convert some of the Liquor Stores outlets into cannabis retail shops. Other locations will be renovated using the Aurora investment. And it will now sell both alcohol and cannabis.

But that’s not all…

Province Brands is making Canada’s first beer brewed entirely from cannabis instead of barley.

Modern Day Wake ‘N Bake

So this is just the beginning…

In the U.S., we’re seeing edibles capture an increasing piece of the adult-use pie

In Colorado, sales of pot-infused treats have more than tripled since they kicked off in 2014. And sales increased more than 120% in Washington in 2016.

Even the beverage segment is starting to gain traction.

Cannabis beverages currently account for 6% of the $543 million edibles market in the U.S. And it’s been growing at a 23% annual rate.

Behind those numbers, there are some fascinating trends…

For example, in Washington, weed-infused sodas captured 77% of the market and grew at a 30.5% pace.

In Oregon, coffee and tea control 32% of the beverage space, compared with just 10% elsewhere. And though total marijuana beverage sales fell 34% in the state, marijuana-infused coffee grew 196% as cannabis tea skyrocketed 975%.

For now, the two combine for less than $1 million in sales in Oregon. So it’s a very small segment that’s rapidly growing.

But for investors, the most important piece of the equation is this: The edibles market was worth $7.2 billion in 2016. And it’s expected to grow at a 25% clip.

Edibles and beverages command higher prices. And for dispensaries, they’ll account for anywhere between 25% and 60% of profits.

Weed and food are a joined at the hip. And not just because of the munchies.

Edibles and beverages have the potential to be an enormous opportunity for marijuana companies. Not only are they more profitable, but they can be sold to a much larger audience. As legalization spreads across the U.S, Canada and the world, this is the marijuana market segment to watch.

Good investing,