CBD-Infused Beverage Makers Aren't Going to Like This New Law

Sean Williams, The Motley Fool

Since the beginning of 2016, the cannabis industry has been practically unstoppable. Throughout North America, support for legalization has grown, and it's translated into the green flag waving throughout the region. Mexico legalized medical cannabis in June 2017; a total of 30 states have given the green light to medical pot in the U.S., as of this past weekend; and Canada lifted the curtain on nine decades of recreational marijuana prohibition.

With adult-use weed now legal in our neighbor to the north, Wall Street and investors are turning their attention to how these companies will go about differentiating themselves in a crowded field. Though dried cannabis flower is often the hallmark product sold by growers, it's also the most likely to be oversupplied and commoditized over time. That means alternative cannabis products -- i.e., cannabis oils, edibles, vapes, concentrates, and cannabis-infused beverages -- could be the X factor that allows pot stocks to stand out and be profitable.

A potted cannabis plant next to a bottle of wine.

Image source: Getty Images.

Cannabis-infused beverages are the apple of investors' eyes

Interestingly enough, most alternative pot products aren't yet legal in Canada. For the time being, only dried flower and cannabis oils can be sold by dispensaries. The expectation from Wall Street and the weed industry is that Parliament will discuss and approve new consumption options in 2019, albeit no specific timeline has been set in stone.

What is clear, though, is that investors are very excited about the potential for cannabis-infused beverages. In particular, this is because brand-name beverage and alcohol companies are willing to partner with pot stocks to develop these drinks.

On Aug. 1, Molson Coors Brewing Co. (NYSE: TAP) announced a 57.5%-to-42.5% joint venture with Quebec-based HEXO Corp. (NASDAQOTH: HYYDF) to develop nonalcoholic cannabis-infused beverages. Molson Coors is looking for ways to end a decline in Canadian alcohol revenue, as well as precipitous drop in market share over the past decade in our neighbor to the north. Meanwhile, HEXO gains the benefit of a deep-pocketed partner that understands how to market new products, especially in international markets.

This partnership was followed not long after with the third and most recent investment from Corona and Modelo beer maker Constellation Brands (NYSE: STZ) in Canopy Growth Corp. (NYSE: CGC). The equity investment, which just recently closed, amounted to $4 billion, and will allow Constellation and Canopy Growth to develop infused beverages, as well as push Canopy's pot products into new markets -- where it's legal, of course. 

These high-margin infused beverages are believed to be a way to encourage more folks to try cannabis products, as well as diversify existing product lines.

A brewer carefully examining a pint of beer being held up in his right hand.

Image source: Getty Images.

CBD-infused beverage companies aren't going to like this

Of course, cannabis-infused beverage companies are facing a bit of an uphill battle. As noted, infused beverages aren't even legal yet in Canada, and there's no exact timeline on when they will be. Then, in late September, California, a marijuana market that could singlehandedly outpace all of Canada, dropped a bombshell on the industry.

On Sept. 27, 2018, it was announced that California Gov. Jerry Brown had signed a bill prohibiting bars, liquor stores, restaurants, and essentially any establishment that isn't a licensed cannabis dispensary from selling alcoholic beverages infused with cannabidiol, or CBD, as of Jan. 1, 2019. CBD is the nonpsychoactive cannabinoid of the cannabis plant best known for its medical benefits.

Cannabidiol-infused beverages are the prime reason Molson Coors, Constellation, and at one time Coca-Cola have shown interest in the cannabis industry. Medical patients are looking for unique ways of consuming cannabis beyond just smoking dried flower, and CBD-infused beverages presumably provide that experience -- and the margin these brand-name companies are looking for.

Brown's signature provides further validation to a ruling made in July by California's Department of Alcoholic Beverage Control (DABC) that banned the use of cannabis oils or CBD-infused alcoholic beverages, although the DABC has suggested that no beverages outside of dispensaries should be sold with infused CBD. Presumably, this leaves the door open for further legislation to restrict the use of cannabis oil or CBD in any beverages, not just alcoholic beverages. Should that happen, experimentation in CBD-infused beverages could slow and provide even less impetus for brand-name beverage companies to seek a cannabis partner.

A cannabis leaf sitting atop a carbonated beverage, with cannabis leaves nearby.

Image source: Getty Images.

Something you've probably overlooked with CBD-infused beverages

While it's clearly a disappointment that California is impeding what could be a high-margin product that attracts new consumers, it's not as if the CBD-beverage industry is ready to take off just yet.

As noted, Parliament in Canada hasn't set an exact timeline as to when it'll review and potentially approve new consumption options. Though this does allow cannabis companies like HEXO, and beverage partners like Molson Coors, the opportunity to build manufacturing facilities and test CBD-infused products, there's no guarantee when such products will actually be legal for sale in Canada.

Even when these products do finally come to market, I have to wonder how much of a needle mover they'll actually be. The competition for CBD-infused beverages in the early going has been fierce, and traditional beverage makers often deal with mediocre margins, at best, once an industry matures. For a company the size of Molson Coors or Constellation Brands, they may not be the difference maker that Wall Street and investors expect.

This'll definitely be an alternative cannabis product worth closely monitoring, but there's also plenty of reason for the initial sizzle in CBD-infused beverages to taper off.

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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.