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For alcohol producers, cannabis products constitute a defensive move


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For alcohol producers, cannabis products constitute a defensive move

Beverage makers face a stark choice as Canada legalizes recreational cannabis: develop marijuana-based products or risk losing sales to those who do.

Using pot recreationally is still illegal in the U.S. on a federal level, whereas Canada's new law, which took effect Oct. 17, allows possession, cultivation and retail sales of fresh or dried cannabis plants or oils, in addition to possession of homemade edible products. Authorities have until October 2019 to devise regulations for retail sales of edible products containing cannabis, including drinks.

But the coming legalization of edible options in Canada, along with the prospect of more U.S. states relaxing their own laws on marijuana use, has already upped the urgency for U.S. alcoholic beverage makers, industry experts and a recent survey indicate.

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An October survey by consulting firm A.T. Kearney found that 26% of U.S. beer drinkers would use recreational cannabis in place of the drink. Slightly smaller percentages indicated that they would consume cannabis over wine and spirits, according to the study, which surveyed 2,000 people in Canada and the U.S.

"This is a topic that is in the boardroom of every beverage alcohol company in the U.S.," Sean Ryan, a partner in the consumer industries practice of A.T. Kearney, said in an interview with S&P Global Market Intelligence.

A budding challenge to brews

Corporate interest in cannabis has taken off in recent quarters. Constellation Brands Inc., the maker of Corona beer, expects to close a C$5 billion investment in Canopy Growth Corp. on Oct. 31 and plans to launch a beverage with the cannabis producer sometime in 2019.

The cannabis market, though, is "incremental" to Constellation's beer business, and CEO Robert Sands does not see cannabis drinks competing with beer, he said during an Oct. 4 conference call.

Molson Coors Brewing Co.'s Canadian subsidiary is also partnering to produce cannabis drinks, with HEXO Corp.. Walmart Inc., Coca-Cola Co., Altria Group Inc. and Diageo PLC are among other companies that have explored the sector, according to reports.

Walmart has acknowledged researching cannabis but is not planning any products based on it, while Coca-Cola said last month that it has not made any decisions about developing products infused with cannabis or its derivatives. Altria has declined comment while Diageo did not return a message seeking comment.

Anheuser-Busch Inbev SA/NV, the world's largest beer brewer, is closely following legalization trends in North America but is not developing or launching any cannabis-based products, a spokesperson said Oct. 18 in an email to S&P Global Market Intelligence.

Beer producers are particularly likely to lose sales to cannabis products, A.T. Kearney's Ryan said. U.S. consumers have purchased more wine in recent years, often at the expense of beer sales, and the improved legal standing of cannabis represents a potential second blow to the brewed beverage, Ryan said.

"Now, you have cannabis showing up," he said. "For beer manufacturers, this has got to be very concerning."

Though Canada's market will remain closed to edibles for another year, what companies do in that time could determine the position they can carve out in the cannabis market.

Tilray Inc., one of the giants in the Canadian industry, has acquired the rights, through a subsidiary, to produce and distribute edibles in the country once legalization takes effect, CEO Brendan Kennedy said in an interview with S&P Global Market Intelligence.

The company also announced plans to launch a cannabis-infused strip that dissolves under the tongue. Kennedy would not say whether Tilray has spoken with brewers about potential partnership but pointed to cannabis as a disruptor for the global beer industry.

"Millennial alcohol consumption, millennial beer consumption, has dropped off a cliff," he said. "It only makes sense for global beer companies and global investors in beer companies to hedge the offset in revenues by investing in this industry."

High hops

Beverage makers could also look to California, where a producer is already selling cannabis-infused drinks at dispensaries in the state.

California, Alaska, Colorado, Massachusetts, Nevada, Oregon and Washington allow personal possession, cultivation and retail sales of recreational cannabis, including infused edible products and drinks. Maine, Vermont and Washington, D.C., allow some possession but not sales, though regulators in Maine are creating rules governing sales.

In California, CannaCraft Inc. partnered with Heineken NV-owned Lagunitas Brewing Co. to launch Hi-Fi Hops, a sparkling hop water infused with chemical compounds from cannabis.

"The big draw to it is that you can drink it and not feel hungover or feel bloated and so people that like the taste of beer and enjoy it, but don't necessarily like the side effects of it are turning to the Hi-Fi Hops for that," CannaCraft Vice President of Communications Kial Long said in an interview with S&P Global.

Lagunitas supplies tanks and the water for Hi-Fi Hops to CannaCraft, which then infuses the cannabis chemicals after processing them into a water-soluble form, Long said.

CannaCraft distributed about 50,000 cans of Hi-Fi Hops to California dispensaries between the July 30 product launch and the end of September, Long said. The company expects to more than triple production in November after switching from cans to bottles and may expand U.S. distribution to any of the nine states where recreational cannabis is legal and CannaCraft has a production facility.

CannaCraft has also met with other beer makers who are interested in Hi-Fi Hops, Long said, but declined to provide company names.

"We know that people are paying attention," Long said.