For the last year or so, big beverage companies have made headlines by investing in cannabis—perhaps most notably Constellation Brands, which invested a staggering $4 billion in Canada’s largest marijuana producer, Canopy Growth. At this year’s Wine & Weed Symposium, held August 8 at the Hyatt Regency Sonoma Wine Country in Santa Rosa, California, industry experts discussed this buzzworthy topic during a panel discussion entitled The Beverage Industry’s Investment in Cannabis—What Does It Mean Long Term?
Moderated by Joyce Cenali, a founding partner and the COO of Big Rock Partners, a San Francisco–based strategic advisory firm, the panel was made up of David Friedman, the founder of the cannabis investment company Panther Capital and CEO at VividGro, an agricultural technology company based in Cocoa Beach, Florida; Marc Hauser, the counsel and vice chair of the Cannabis Practice Group at the international law firm Reed Smith LLP; and Joe Rogoway, the CEO and managing attorney at Rogoway Law Group, based in California.
Federal Challenges Continue
Cenali began the session with a news update: On August 7, Arizona Beverage Co., the firm behind Arizona Iced Tea, announced a licensing deal with the cannabis company Dixie Brands, based in Denver. According to a Wall Street Journal report, Arizona Beverage is likely to start by selling cannabis gummies and vape pens, followed by a variety of drinks. The deal reportedly came in response to a slowdown in the company’s tea sales.
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The number of additional big drinks players that will enter the cannabis space will largely depend on the status of federal law, the panelists said.
“That’s probably the biggest barrier,” said Friedman, citing marijuana’s federal designation as a controlled substance and the accompanying banking challenges for cannabis companies. (Because cannabis is illegal under federal law, and the government oversees the country’s banks and credit unions, banks will often not do business with cannabis companies.) “Hopefully,” said Friedman, “legislation like the STATES Act [a bill that would amend the Controlled Substances Act and exempt state-approved marijuana activity from federal enforcement] will be signed into law.”
There are additional bills in Congress that would decriminalize cannabis across the country, removing it from its current Schedule 1 status, but they face an uphill battle in the Republican-controlled Senate. As long as cannabis remains a Schedule 1 substance—the classification means the drug has no medical benefits—companies are faced with barriers such as being restricted from selling their products across state lines, and being prevented from writing off business expenses on their federal tax returns.
What Friedman is seeing in the meantime is a lot of smaller players getting involved behind the scenes. “Here in Sonoma County,” he said, “there are a lot of people who own wineries who have separate silent companies that they’ve formed for participation in the cannabis space.”
For example, Francis Ford Coppola, the film director and owner of the Francis Ford Coppola Winery in Geyserville, launched a brand of cannabis flower in 2018, which is sold in select California dispensaries. Under federal law, wineries aren’t allowed to sell cannabis, so Coppola created a separate corporation for the venture, called Sana Company. The cannabis is grown under a licensing partnership with The Humboldt Brothers, a cultivator in Humboldt County.
While it’s risky for federally licensed businesses such as wineries to get involved with cannabis, Hauser pointed out that the chances of enforcement are minimal. “I know we’re supposed to say that it’s illegal under federal law,” he said, “but I think more and more businesses are realizing that the [enforcement] risk is infinitesimally low. The Treasury Department’s not going after this, and as larger participants come into this industry and see this opportunity, I think it’s going to be a bandwagon. At least, that’s my hope.”
Returning to the Arizona Iced Tea news, the panelists shared their thoughts on whether or not established beverage brands will put their names on cannabis products. Friedman didn’t see it as likely.
“I think they’re going to keep their non-cannabis brands independent, at least for the short term,” he said. “For the most part, it’s not because of legislative risk—it’s because of reputation risk.” He noted that banks, for example, are afraid of losing customers if the public learns that the bank is dealing with illegal cannabis companies, so established drinks brands are wary of putting their names on cannabis products.
What Drinks Companies Should Look for When Investing
Drinks companies wanting to invest in the cannabis space must consider many factors before jumping in, the panelists said, such as competition from other products and how to find a partner that understands the cannabis business.
“There are a zillion brands out there,” Hauser said, “and none of them have anything beyond regional recognition.”
Friedman countered that because big beverage companies excel in branding and marketing, they may be able to use that expertise to make inroads where small, independent cannabis companies have fallen short.
Rogoway thinks that one of the exciting things about the beverage industry’s involvement in cannabis is the potential for innovative new products, such as Hi-Fi Hops, the hoppy, cannabis-infused sparkling drink introduced last year by the Heineken-owned Lagunitas Brewing Co., headquartered in Petaluma, California. The alcohol-free beverage is produced in partnership with AbsoluteXtracts, a California-based cannabis company. Said Rogoway, “I think there are some really interesting opportunities for traditional beverage companies to participate in the cannabis industry.”
Coming up with great ideas for new products is only half the battle, however. To be successful, drinks companies need to find the right partners on the cannabis side. “There are not a lot of people who have grown up in the cannabis space,” said Friedman. “Most of us have immigrated here over the last 5 to 10 years. Companies that are coming in need to buy up that intelligence and that domain expertise. I don’t think you’re going to see a Coca-Cola decide, ‘Okay, we’re going to launch a brand on our own.’ They’re going to acquire a partner like everybody else has done at this point.”
Rogoway stressed the importance of compliance when looking at the operations of cannabis companies with investment in mind. “Understanding what the rules are—beyond just having basic permits or licenses—on a day-to-day level and operating in a way that is 100 percent compliant are really important,” he said. “Those are the kinds of things that I see investors really caring about.”
Evaluating market share, said Friedman, is another solid approach when looking for cannabis companies to do business with. “I think you’re ultimately going to see consolidation down to about 15 players in the North American cannabis marketplace,” he said. “Who’s got the biggest footprint—not necessarily by volume but by the number of states that they’re in? Eventually, when those [regulatory] veils get lifted, you’re going to see economies of scale in distribution and all those things that make mainstream businesses more efficient.”
Large brewers, for instance, are able to procure materials in bulk, have easier access to efficient transportation for their products, and can produce their beer in large volume, bringing down production and distribution costs. Cannabis companies looking to sell their products in multiple states could potentially benefit in the same ways.
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New Opportunities and Other Investing Advice
When considering investing in the cannabis industry, Hauser said, it helps to think beyond the existing types of businesses, such as dispensaries. “I think as time goes on,” he said, “cannabis retail is going to look more and more like the corner store and be less and less lucrative, especially if we don’t have the ability for on-site consumption. That is an important thing to overcome so we can have other lifestyle interfaces—like you have spas or hotels and places where food is prepared.”
For those looking to invest in industrial hemp cultivation, which has fewer regulatory hurdles because of its legal federal status, Rogoway advised seeking out grow operations in areas of the country where land prices are cheap. “Why would someone spend the money to buy acreage here in Sonoma County that they could use for a Russian River Pinot vineyard?” he asked, pointing out that land prices are much more affordable in, for example, Nebraska. “The end result is the same.”
Because hemp is largely used for industrial purposes, growing it in high-dollar regions like Sonoma would be unlikely to increase the crop’s cachet or bring in higher prices, as it would high-end cannabis.
For wineries, infused beverages seem like a natural way to enter the cannabis business, but they have their own set of challenges. This is where hemp-derived CBD could provide an advantage. “If you’re talking about a THC cannabis beverage,” Rogoway said, “there are a lot of regulations that you have to deal with—local approvals and state approvals. But if you have [a beverage made with] industrial-hemp-derived CBD, you don’t have that.”
Wineries that decide to produce drinks containing THC, the psychoactive compound responsible for the “high” of cannabis, should also take taste into account. Because it’s not legal to combine alcohol with THC in consumer products, cannabis-infused wines must be dealcoholized. The result is often something that isn’t very winelike in character.
“Hopefully,” Rogoway said, “somebody can figure out a way to make an infused wine product that tastes good. That would be a really good place to start.”
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Tina Caputo is a writer based in Northern California who covers wine, beer, food, and travel. She was formerly the editor in chief of Vineyard & Winery Management magazine, and her work has appeared in Wine Enthusiast, Visit California, Sonoma magazine, the San Francisco Chronicle, and many other publications. She also produces the podcast Winemakers Drinking Beer.