Cannabis News

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INN spoke with an industry leader who has keen insight into how tobacco and alcohol companies evaluate the cannabis market.

An analyst with experience overseeing tobacco and alcohol players believes there’s no doubt these companies want a piece of the cannabis pie, but told the Investing News Network (INN) that they are unsure of the best approach after previous blunders.

Shane MacGuill is the global lead of nicotine and cannabis with Euromonitor International, a strategic market research company evaluating the European territory, a burgeoning arena for cannabis.

The expert explained that his client base looks to the firm for periodically updated data-based reports. Some of those clients include consumer packaged goods (CPG) and fast-moving consumer goods companies.

When asked whether bigger-name CPG firms are still interested in the cannabis growth opportunity, MacGuill said their attention hasn’t changed despite the struggles cannabis has seen in the past few years.

“I think the short answer is yes … uniformly there's always interest there,” the analyst said. “And there's always a sense that this is something that's attractive.”

How do big CPG brands examine the cannabis market?

MacGuill explained that although big-brand CPG players have an interest in cannabis ventures, they rarely make them a first priority. This lack of prioritization generally means that at any given time there are only a few people within a corporate entity who are granted permission to investigate or keep track of the cannabis market.

On top of that, more often than not, researching cannabis ventures is not the first, second or even third priority of the cannabis-focused people at large CPG companies, the data analyst said.

He noted that there’s a taboo aspect to even doing market research around cannabis.

The expert told INN that one tobacco client of his firm used a subsidiary to set up separate accounts within Euromonitor's research system for the two employees it had tasked with keeping up on the cannabis market.

“We can give them access to make sure that no one else in that company can see this data. It’s still quite cloak and dagger and still quite limited,” MacGuill said. “I do expect that to change over time.”

Background of cannabis appeal for big CPG brands

Players in industries like tobacco and alcohol have already taken their first steps into cannabis.

The cannabis investment market was changed forever the day Canopy Growth (NASDAQ:CGC,TSX:WEED) confirmed an investment deal with Constellation Brands (NYSE:STZ) — a transaction that resulted in the alcohol-maker gaining a stake in a leading Canadian cannabis operator.

Following Constellation Brands, Altria (NYSE:MO) completed a similar deal with its investment in Cronos Group (NASDAQ:CRON,TSX:CRON).

Since then, other players have followed suit with smaller-scale deals and partnerships, including Imperial Brands (GBX:IMB), Molson Coors (NYSE:TAP) and British American Tobacco (NYSE:BTI).

No deals have been made between CPG leaders and plant-touching US cannabis operators due to the federal illegality of the drug, and a lack of federal protections for financial activities related to cannabis ventures.

Losses of the past affecting new entries?

Following a saturation of cannabis excitement, the market has been met with poor financial performances from leaders in Canada, resulting in a serious downturn in valuations.

At the same time, the investment deals the cannabis market has seen from CPG players have not yielded the results these giant companies had hoped for. These results are directly impacting the way other tobacco and alcohol companies evaluate their entry plans.

“It solidified in a lot of other people's minds that what they didn't want to do is go in and buy production capacity,” MacGuill said, referring to the deals of the past, in particular the Constellation Brands and Altria investment plans.

Instead the prize to close a deal now centers around added value and a strong brand portfolio, the analyst told INN. “They also want to enter on their own terms,” he said.

MacGuill told INN he views these companies as wanting to have full assurances and control every aspect of their potential entries into cannabis — whether it be through partnerships, acquisitions or organic growth.

CPG players could fill brand expertise gap in industry

Among the cannabis industry's many challenges, branding awareness continues to plague the market in Canada.

Even though cannabis has been legal for adult use in the country since 2018, several reports show brand attachment is extremely low around Canada. And since there are limited possibilities for brands to cross from the US to Canada, international recognition also remains limited.

"That’s where the CPG companies, I think, can really add some value to the industry,” MacGuill told INN. “It’s not just coming in and being predatory around controlling the entire supply chain or whatever, but actually going to build some of that brand infrastructure.”

During a panel discussing the current territory expansion landscape and the entry of new players in the cannabis market, Deepak Anand, founder of medical cannabis company Materia, said he looks forward to the day more tobacco players step foot in the cannabis market.

Anand added that these corporations will bring a new level of expertise and know-how to the industry. “I think you'll start to see movement from bigger companies like that, they're very seriously looking at it.”

The medical cannabis expert expects these large CPG players to focus primarily on a lifestyle approach to cannabis, rather than directly head into the adult-use sector.

Investor takeaway

It’s clear interest in cannabis opportunities from bigger CPG players has not diminished.

But investors must realize that these players are not eager to see the same mistakes of the past repeated.

“There's potential there, but it's around wanting to set the terms of engagement as much as they can themselves before they kind of commit,” MacGuill said.

Don’t forget to follow us @INN_Cannabis for real-time updates!

Securities Disclosure: I, Bryan Mc Govern, hold no direct investment interest in any company mentioned in this article.

Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.


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