Constellation Brands and Canopy Growth a ‘cautionary tale’ for cannabis investment

After sparking an investment rush in the drinks sector, Constellation Brands has marked down its stake in cannabis company Canopy Growth, again as the grower struggles to become profitable.

Canopy sold over 10 metric tons of cannabis in the first fiscal quarter

In the three months to November 2019, Constellation, which produces Corona beer and runs around 40 wineries, breweries and distilleries, reported net sales of the group’s wine and spirits portfolio reached US$688.8 million, while operating income fell by 12.4% to US$180.4 million.

At the same time, the company also wrote down its 38% stake in Canopy Growth, Canada’s largest grower, by US$534 million.

Constellation has invested roughly $4 billion in Canopy Growth since 2017. In January 2019 the drinks giant announced that it would be building a hemp extraction and product manufacturing facility in New York.

However, the cannabis company is still loss-making, and has said last year that investors could be waiting for a few more years before it turns a profit. Constellation said it made an unrealised $223 million net gain on its stake since November 2017. Current Canopy Growth CEO David Klein took over from Mark Zekulin on January 14.

Constellation already wrote down its investment by $839 million in October last year.

Spiros Malandrakis, drinks analyst at Euromonitor, told the drinks business that producers shouldn’t be put off exploring opportunities in the cannabis industry, but they should be much smarter about how they invest.

“There is a cautionary tale here,” he told db, “but it’s not about entering the cannabis segment, it’s about having a more strategic or nuanced approach than ‘big is best’.”

Constellation may have been one of the first large producers to spark up a partnership with a major cannabis grower, but Malandrakis said the deal was made with “a complete lack of focus and had logistical downsides.”

Despite this, Malandrakis believes that investing in cannabis is still an “absolute necessity” for alcohol companies.

A number of drinks giants have taken interest in this emerging category. UK-based Diageo been in talks with three different Canadian cannabis producers with a view to developing its own line of CBD-infused drinks, while Californian brewer Lagunitas, owned by Heineken, launched its own THC-laced, alcoholic “beer” last summer.

Recreational cannabis use has only been fully legal in Canada for just over a year, and Malandrakis argues this is not long enough to cast doubts over its potential. Volume sales of domestic beer in the country fell by 3.9% during the first year of its legalisation, according to findings published by Beer Canada.

Malandrakis said alcohol companies of all kinds will be directly competing with cannabis producers in the future.

“I haven’t changed my mind about the potential of the industry…the opportunity is still there but somewhere along the way people got a little overexcited.”

“I don’t think anyone has a perfect approach – companies like AB InBev have been much more light handed – perhaps it’s also an approach we’ll see in future, but we have to stress the major issue is overpaying for stuff that is not necessary.”

Constellation reported a 9% net sales decline for its wine and spirits business in the third quarter of its fiscal year.

However, the company’s beer sales fared much better. Beer was up 8%, driving a 2% lift in group sales for the period.

Constellation Brands recently revised its deal with E&J Gallo after falling foul of competition regulations, removing certain wine brands from the transaction and reducing its value by US$600 million to $1.1 billion.