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FoodDive, By Emma Liem, Published Aug. 15, 2018 

Dive Brief:

  • Constellation Brands and Canopy Growth, the world’s largest publicly traded cannabis company, have announced a major expansion of their strategic partnership “to position Canopy Growth as the global leader in cannabis production, branding, intellectual property and retailing,” according to a company release. The beer giant will spend C$5.08 billion ($3.88 billion) to increase its ownership of the cannabis company to 38%, and will nominate four directors to Canopy’s seven-member board.
  • This is the largest investment the cannabis industry has seen to date, according to Yahoo Finance. Canopy will use the funds to gain a foothold in emerging recreational cannabis markets, as well as gain global scale in the almost 30 nations working toward federal medical cannabis programs.
  • “Through this investment, we are selecting Canopy Growth as our exclusive global cannabis partner,” Constellation CEO Rob Sands said in the release. “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.”

Dive Insight:

Constellation is convinced there’s green in the cannabis industry, and its increased ownership in Canopy Growth — valued at C$7.09 billion ($5.40 billion) — should vault it to the forefront of this fast-growing market.

The beverage maker first acquired a 9.9% minority stake in the marijuana company for $191 million in October. CEO Rob Sands told The Wall Street Journal at the time that this investment would give it a “first-mover advantage” in an industry he expects to soon be legalized nationwide in the U.S.

While this prospect may have seemed far-fetched five years ago, legalization has made serious strides of late. Nine U.S. states and the District of Columbiahave now legalized recreational use of marijuana, with 12 more states expected to make the change this year. In the meantime, Canada is preparing to fully legalize cannabis in the fall — a playing field where Constellation can experiment until the U.S. catches up.

This could give the beer giant valuable time to perfect the marijuana-based beverages it plans to create with Canopy so they’re optimized for the American marijuana market, which is expected to reach $10.2 billion next year, according to Euromonitor International. According to a report from CIBC Capital Markets cited by BNN Bloomberg, the market for recreational marijuana in Canada could hit $6.5 billion by 2020 — exceeding the country’s 2017 spirit sales.

Wells Fargo Securities analyst Bonnie Herzog wrote in a note that Constellation’s move will accelerate the market.

“While there could be some cannabilization risk for [Constellation’s] beer/alcohol portfolio, we believe the strategic partnership will ultimately be incremental to [Constellation’s] core business, especially as the deal opens the door to tremendous white space opportunities globally — beyond [Constellation’s] current U.S. limits with its core brands,” she wrote.

Constellation may be in the lead when it comes to cannabis-based adult beverages, but it’s far from being the only contender. Last year, Lagunitas Brewing launched an IPA made with marijuana terpenes, the aromatic compounds of fragrant oils derived from the cannabis plant. But this brew, which is available exclusively in California for a limited time, doesn’t contain any THC, the psychoactive ingredient that causes the marijuana high.

It’s unclear if Constellation plans to formulate its beverages with THC or CBD, a cannabinoid that has been embraced by the holistic health industry as a natural aspirin, or if its marijuana-based drinks will also be alcoholic. Blue Moon’s creator and former head brewmaster launched a beverage company that will roll out cannabis-infused but alcohol-free beverages.

Brewers could avoid formulating their alcohol with THC for safety reasons, but that shouldn’t deter consumers looking for a buzz.

“People don’t want to smoke things anymore. Combustion is dirty and smelly. It’s also imprecise — you don’t really know when you inhale a substance how much of it is actually absorbing into your lungs,” Justin Singer, CEO of cannabis company Stillwater Ingredients, said during a panel at IFT. “The beauty of an edible is, if done correctly, it delivers a precise dose.”

Constellation’s investment, along with softening consumer sentiments about the once-taboo substance, will likely spur additional deals between the beer and marijuana categories. What remains to be seen, however, is whether the beverages that come out of these partnerships are viewed simply as novelty products or are accepted as new category staples. Regardless, Constellation’s head start in this race is bad news for smaller competitors, who may need seriously deep pockets to check the beer giant’s gains in this budding industry.

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