The growth potential for cannabis companies is the same as that of alcohol after prohibition ended….
All alcohol companies are going to have to get involved in this industry at some point.”
           ~Dan O’Neill, former CEO of Molson (2000-2009)

“All cannabis companies are going to have to be in the beverage industry at some point.”
               ~Terry Donnelly, CEO of Hill Street Beverage Company Inc.

The global market for beer accounted for more than US$590 billion in 2017 and is forecast to grow at an annual rate of 1.8% from 2019-2025. That said, much of the expected growth comes at the expense of traditional alcoholic beer products. While global consumption of traditional beer dropped in 2015 and 2016, the market for non-alcoholic beer grew 5% in 2016.

Now, legal, recreational cannabis is putting additional pressure on the beverage alcohol market. In Aspen, Colorado, sales of legal marijuana have overtaken those of alcohol. It is believed to be the first time this has ever happened in the US.  Generally, in counties of US states with medical marijuana laws, alcohol purchases have decreased by 15%.

In Canada, laws and regulations regarding recreational use of cannabis are still being written, and there is a prohibition on advertising marijuana using traditional broadcast media. The combined effect is a prolonged setup of the opportunity, which does not favour large brewers accustomed to big budget deployments. Therefore, we tend to see indications of activity, but there can be no full-scale cannabis-based beverage brand rollouts at this time.

On the consumer front, millennials are choosing “smaller” beverage brands over larger ones. We see this with the growth of craft brewers in Canada. In 2017, the number of operational facilities increased by 17.6% to an all-time high of 817. According to Carlos Brito (CEO of AB InBev—the world’s largest brewer, with 28% market share by global volume), “The big things are declining. The smaller things are growing.” Perhaps as a follow up to that comment, last week, AB InBev announced it had created a Chief Non-Alcohol Beverages Officer position to address revenue and volume declines in the traditional beer segment.

On August 1, Molson Coors Canada and HEXO (one of the top 10 licensed producers of cannabis in Canada by market capitalization) announced a joint venture for the purpose of launching non-alcoholic, cannabis-infused beverages for the Canadian market. AB InBev and Molson Coors collectively control almost two-thirds of the market share of traditional beer in Canada, and while their respective announcements provide an indication of their intentions in the marketplace, it will take months for their plans to bear fruit.

The Molson-HEXO announcement is the third major alcohol-pot pairing in the past year, and Terry Donnelly, CEO of Hill Street Beverage Company (TSX-V:BEER, “Hill Street”) expects more to come. “In Canada, of the 65 owners of the 114 licences to produce marijuana, only 4 have a beverage strategy.  Hill Street, as a developer of brand properties for alcohol-free beverages, intends to be partnered with at least one of the remaining 61.”

Hill Street management recognized early on that alcohol free as a format is an ideal precursor or forerunner for a future cannabis-infused version, and that much of the buzz around alcohol free that is coming from major beer companies is a jockeying for position in anticipation of October 2019, when cannabis-infused edibles are scheduled to become legal in Canada. Large beer companies are maneuvering for reasons we have already discussed, spending money on advertising alcohol-free beers in an attempt to build new brands they can switch to cannabis-infused in October 2019.

Unlike many traditional adult format beverage companies, Hill Street was built from the ground up to provide new, award-winning products that taste good on their own merits. From a brand perspective, many of the large brewers have to be careful because line extensions often take market share from their lead brand from which they are derived (think Coke Zero). In addition, since alcohol free beverages do not taste the same as their alcohol-based cousins, straight line extensions of popular beers may disappoint consumers of those brands.

For investors, the key takeaway is this: Whenever you see an advertisement for a well-known beer that is now alcohol free, an effective way to participate in this category is to own a pure play like Hill Street Beverage Co. While alcohol-free and cannabis-infused are going to be significant new businesses for global beverage behemoths, there is likely to be an offset in terms of volume lost from their traditional alcohol-based beverages. We believe that Hill Street provides significant investment return potential in terms of torque given its comparative size, the absence of any alcohol-based products in its portfolio of brands, and the Company’s strategy of launching cannabis-infused beverages that will taste just like its alcohol free products. Come October 2019, Hill Street expects to have a slate of craft beers that will satisfy the tastes of those seeking alcohol free or cannabis-infused formats.