Beer and wine giant Constellation Brands made a $4bn investment in Canadian company Canopy Growth last year, taking a 35% interest in the company. It says that while the Canadian cannabis market is 'on track' it is expected to be volatile as is evolves.
But across its total business, Constellation Brands’ first quarter 2020 results exceeded expectations, with its beer business aiming for net sales and operating income growth of 7-9% for FY2020.
Cannabis beverages: high margin products
Canopy Growth Corp’s business spans medical and recreational cannabis, including numerous production facilities. Constellation’s initial investment in the company in 2017 was made to ‘identify, meet and stay ahead of evolving consumer trends and market dynamics’, with the aim to develop cannabis-based beverages in markets where such products are legal.
Constellation Brands reported a $828m decrease in the fair value of its investment in Canopy Growth in the first quarter of fiscal year 2020.
“While we remain happy with our investment in the cannabis space and its long-term potential, we were not pleased with Canopy's recent reported year end results,” said Bill Newlands, Constellation Brands president and CEO, speaking in last week’s earnings call.
“However, we continue to aggressively support Canopy on a more focused long-term strategy to win markets and form factors that matter while paving a clear path to profitability.
“We believe some of these branded form factors include vape, beverages and edibles that will command higher margins. These products in Canada as well as CBD products in the US are expected to come on line during the fourth quarter of this calendar year.”
Canada: Exciting, but volatile
Canada legalised recreational cannabis last year, with cannabis edibles set to follow suit in October this year. However, edible cannabis products – including beverages – won’t be able to hit the market until mid-December at the very earliest, due to the notice period needed to register new products, with most products unlikely to reach the market until 2020.
Constellation says the new Canadian market can be expected to be ‘volatile’. “We all need to recognize, there are going to be spits and starts around a business like this, when various form factors and products either have better acceleration or weaker acceleration of what everybody had anticipated,” said Newlands.
For example, Ontario will ultimately be the biggest province for cannabis, but has been a little behind other provinces in terms of opening stores, he noted.
“What we remain excited about is this is going to be a big long-term business, and we are working with Canopy almost on a daily basis to ensure we are focused on all the right things. The things that are going to drive the business, the things and the form factors that are going to matter in a way that gets to ultimate profitability for that business in an appropriate time frame.”
‘We’re very happy we made the investment when we did’
In April, Canopy Growth Corp announced it had acquired the right to buy US cannabis operator Acreage Holdings for $3.4bn, contingent on the US legalizing cannabis.
“We are excited about this opportunity as it provides a path for Canopy to have a leading position in the US upon federal cannabis reform,” said Newlands.
Ultimately, Constellation Brands believes it has made a strong move in getting into the cannabis space early, added CFO and executive vice president David Klein.
“We still are very bullish on our Canopy investment, and we're very happy we made the investment when we did into this space, which more and more people are starting to wake up to.”