While US mkts like California cannabis biz expected to “get worse before it gets better,” Canada expected to “stabilize by the end of the year” in 2020, predicted MJ Biz Daily’s CEO Chris Walsh at MJ Biz Con last week (see Dec 13 issue). As regulatory landscape is tweaked, there’s also “pressure” on public cos to “retract and meet reality” on projections and valuations. So Chris sees faster “road to recovery” in Canada vs Calif. Canada’s only been legal for 14 mos now – there’s been several “bumps along the way” – yet this has been an “amazingly fast ramp up,” said Ray Gracewood of Organigram on separate panel of Canadian cannabis execs. Industry should “temper expectations of ourselves” in 2020 and beyond. “God forbid we focus on profitability” vs “what’s your capacity” and “valuation,” he quipped.

Vapes and Edibles Can Reach Similar Share vs US Mkts There are “huge” oppys with Cannabis 2.0 products, including vapes, edibles/bevs and more, officially legal to sell starting today (Monday, Dec 16), according to Ray. Vapes and edible products can reach similar mkt share in Canada as in US, he thought. Vapes reached 20-25% share before issues arose this yr on product safety, and with blame generally placed on illicit mkt, legal vape sales already “starting to come back” in US. Edibles are around 10-15% share in US. And tho Canadian edibles limited in comparison to US, with various branding and product type restrictions, as Sherry Boodram of CannDelta noted, still significant runway ahead, sez Ray.

Infused Bevs No Big Deal? Notably, despite investments from large brewers in Canadian cannabis space to develop infused bevs, Ray doesn’t think it’ll be much different from US, where THC bevs make up less than 1% of total legal mkt currently. “Powder products” using nano-tech and fast onset highs are best option in his view, since they can be “super flexible to consumers” to mix in bevs or food, “economic” and “lightweight.” Many of these large cos have “infinite resources,” so if there’s a way “to figure it out, they’re going to,” he added. But their “ability to build” mkt and demand for new infused bev products “might be limited” vs oppys to invest in bev alc brands. Lastly, it’s still “very difficult to work with CBD” in Canada since it’s still regulated “on par” with THC there, noted Deepak Anand with Materia Ventures. But it represents “tremendous opportunity” and folks are “lobbying extensively” to change laws there, he and Sherry pointed out. CBD bevs have chance to create “new category” on the “wellness side” rather than “displacing alcohol,” added Deepak.

Trevor Stirling and his team at Bernstein joined a coupla other financial analysts in speculating that Molson Coors revitalization “could lead to the ultimate disposal of its Europe and International operations.”  But as they look thru potential buyers, that possibility actually recedes.  Combined, Euro and Intl approx 21% of net sales, 12% of EBIT, Bernstein sez.  UK is biggest piece (42% of volume) plus “mish-mash” of Central & South Eastern Europe.  The “latter is mainly the legacy StarBev business,” focused on Romania, Czech Republic and Hungary.  Molson Coors Intl is 3 breweries in India, where beer remains small share of alc bev consumption, tho with long-term promise, plus small export/licensing biz.

So, who would be the buyer, if in fact Molson Coors interested in selling these assets?  AB InBev “unlikely to bid for any of the assets,” Bernstein sez, since it passed on StarBev and “would likely have competition issues in the UK.”  Plus, it’s trying to pay off debt.  Heineken would have “competition constraints in virtually every country.”  Ditto Carlsberg in several.  It might be a buyer in UK, tho even there “dual management of both the Carlsberg and Carling mainstream brands could be challenging.”  How about Asahi, which has been on a bit of buying spree of late?  Nope, some antitrust issues there too, and even if Asahi interested in UK or other markets, “these are far from must-do deals for Asahi.”  Net-net, at least for big global players, it’s those 3 breweries in India that are “most likely to gain interest,” report concludes.

 Consumer price index growth for beer slowed to +0.7% in Nov vs Nov 2018, per latest gov’t stats. That was lowest percentage gain for beer CPI in 18 months.  CPI for All Items up 2.1% in Nov.  Spirits posted solid price gains consistently thru 2019 but were off 0.6% in Nov after holding even in Oct. CPI for wine gained just 0.4% in Nov.  CPI for beer was ahead of all items by 2.1% to 1.7% respectively thru 3d qtr, but that gap shrunk to 1.9% vs 1.8% thru 11 mos.  CPI for spirits was up 1.6% while wine up 1.2% YTD thru Nov.   

Ain’t just beer giving up share to spirits these days.  Just as Silicon Valley Bank analyst Rob McMillan has been talking about wine slowdown and millennial challenge to that bev, SipSource, which reports distrib depletion data, estimates wine volume down 2.2% for 12 mos thru Sep 2019.   That’s while same depletions data suggests spirits up 3.2% same period, opening up a 5.4% trend gap.  That’s according to SipSource blog post titled “An Epic Divergence between Wine and Spirits.”  Indeed, wine biz off for 6 straight quarters, SipSource sez.  “All traditional table wine varietals with the exception of Cabernet Sauvignon, Sauvignon Blanc and Rosé [are] trending south.”   In addition to spirits putting a hurt on wine (and beer), consumers also “choosing hard seltzers, which are booming, over wine,” adds SipSource analyst Dale Stratton.

Meanwhile, key liquor categories healthy for 12 mos thru Sep ’19: vodka +1.9%, whiskey up more than 4%, tequila up near 10%.  But rum and gin off 2.3% and 1.4% respectively.  On-premise, spirits depletions slowed a point or so during this 12 mos, but still +1.9%, while “we have seen steep declines in wine on-premise over that period as well,” said Dale.

No two ways about it, 2019 was “tumultuous year” for legal cannabis sales in US, Canada and across the globe, MJ Biz Daily co-founder Cassandra Farrington opened in her remarks at massive MJ Biz Conference in Las Vegas this week, with more than 35K attendees.  That’s up from 26K last yr. This yr’s conference far more grounded and cautionary tone echoed thruout the conference vs 2018.  Beverages still a tiny portion of the cannabis industry (< 1%) on exhibitor floor (tho more bevcos were in attendance). But MJBizCon still continues to showcase overall optimism in cannabis space, and an ever-increasing number of folks looking to get in on the action.

Highest # of attendees were from US, including CA, CO, NV, OR and NY with most, yet there were also attendees from over 75 countries this yr, shared prexy and incoming CEO Chris Walsh. Industry went from “stock highs to stock lows,” gaining momentum in legalization to “struggling to draft effective legislation to get through the house chamber,” licenses getting revoked, “agonizing failures” in Calif mkt, vape “crisis,” and more all just in last 12 mos, Cassandra noted. But this past decade was like the “teenage years” of cannabis industry. It “transformed” into “thriving legitimized global industry” in that time, while making “plenty of mistakes” and learning “important life lessons” along the way. Now “for the most part,” cannabiz is “ready to leave the awkward teenage years in the rearview mirror,” with “all the potential of young adulthood,” and “coming of age” with “the rigor and drive of youth.” There are still “non-normalized” biz operating conditions. But broad legalization still “feels inevitable.”

NY and NJ “Not Defeat,” Just “Delay”; CA Woes But “Sky Is Not Falling”; Newer Mkts Comin’ On; CBD While IL was “big win,” NY and NJ legislation for recreational sales fell flat in 2019 for variety of reasons, Chris recapped. And CA “not going in the right direction to stabilize,” still “drowning in problems” with regulatory “chaos and confusion,” incoming “license suspensions,” “delays” and more uncertainty with taxes set to rise in 2020. Some cos that overinvested and “scaled too aggressively,” while landing lots of money, “can’t wait much longer to sort this out,” a problem not unique to CA either, Chris noted. But “sky is not falling” in CA, with between $2.2-2.7 bil in legal sales in 2019 and expected growth for yrs to come. NY and NJ “will legalize once they come to an important agreement on some important issues,” predicted Chris. It’s “not defeat,” but just “delay.” Plus, MA sales are “finally booming,” up to $394 mil in recreational sales for 12 mos since launching last Nov (with very limited # of dispensaries statewide), per state data. OK was standout medical mkt, generating over $100 mil in sales thru Q3 with 5% of state’s population now registered as patient. Both IL and MI projected bigtime potential revs of over $1 bil (eventually). ME finally plans to launch rec sales. And “mature mkts” like CO and WA are still growing solidly, which is “encouraging” sign.

There will be “pain” on CBD side that “could lead to overproduction,” he added. But category still presents “robust” oppy that could reach $9.3 to $11.3 bil by 2024, MJ Biz estimates, as several “major retailers” such as Kroger, Walgreens, CVS already selling CBD products and folks await clarity from FDA. And while Chris expects increases in “anti-legalization forces” and “crackdowns” on issues like taxes, corruption and safety, this could lead to new regulations, which “could be a very good thing” in moving industry forward, sez Chris.

Other Legalization Possibilities; VA Front-Runner? Other “possibilities” for legalization at state level next yr, or at least progress toward legalization, include AZ, DE, FL, MN, MT, NM, SD and VT (commercial sales), Chris highlighted. And on medical side, there’s “optimism” in AL, MS, SD, KY, NE and SC, as well as limited programs in IA, GA and VA that “could develop more traditional programs” – all states that 7-8 yrs ago folks would “never” have thought they’d be in a position to legalize any form of cannabis sales, Chris pointed out. Separate panel of state lobbyists highlighted VA as their top candidate state for passing recreational sales. There’s “always a surprise state or two” as well as “locks” that “don’t make it,” said Chris. But taking zoomed out, long-term view of progress made, there are tangible changes in legislation and ethos around cannabis across the country and globe.

Pace of Investment Slowing; “Not as Much Irrational Exuberance” Meanwhile, pace of investment is slowing down and stocks “still taking a beating, as they should,” said Chris. But investors “now more judicious” and there’s “not as much irrational exuberance.” “Strong big players” are looking to merge with “strong small players” rather than take big bets on larger acquisitions. And on private side there’s “still a lot of activity.”

MJ Biz Daily Partners with Cowen to Distribute Cowen Cannabis Research MJ Business Daily is entering its next phase internally as well, as Cassandra steps back from CEO role, Chris steps in, and co formed new partnership with Cowen Insights to “extend distribution” of Cowen’s “cannabis industry thought-leadership,” cos announced.  Recall, analyst Vivien Azer was quick to hone in on cannabis industry, helping Cowen become the first firm to initiate coverage of legal cannabis. Partnership expected to kick off in Q1 2020.

“I think they think they’re doing their job,” veteran alc bev atty Marc Sorini said at Beer Insights seminar when asked about stepped-up TTB trade practice investigations this yr.  Then too, TTB got $5 mil grant to do this and is taking that seriously.  “Having said that, I have some concerns with some of the strategies that TTB has taken.”  Violations of tied-house laws, Marc points out, need to include “a real threat to retailer independence,” not “one bottle, one day.”  But TTB now interprets law to “read that [threat] completely out of it.”  Marc also troubled by TTB “beating up on some of the small wineries over consignment sales,” claiming they’re “willfully” breaking a law they may not even be aware of.  

Recall, TTB’s sr counsel for field ops Daniel Peralta said at CLE International’s conference 3 mos ago that a big offer in compromise was pending at TTB (see Sep 17 Express).  That offer will be larger than any previous one in current round of TTB actions, he said then, more than Heineken USA’s $2.5-mil offer back in March. But still no announcement.  Will (or did?) a big company push back vs TTB, we asked Marc.  “Could be.  I’ve done a lot of TTB investigations and it’s usually ‘write the check.’  But I think that a lot of those TTB positions are ripe for litigation. They’re out on a limb on some of this.”

The big are getting bigger yet again.  Megadistrib Crescent Crown will acquire Streva Dist, about a half-mil case MC and HUSA distrib in New Iberia, Louisiana.  Between its LA and AZ distribution bizzes, Crescent Crown sez it sells about 34 mil cases.  Streva yet another smaller MC distrib that’s been around since the end of Prohibition.  “Both Jerry and Carl Streva are true ‘Icons’ of the Louisiana Beer Industry,” said Crescent Crown prexy Bubba Moffett.  Recall, Crescent Crown is a partnership between the Moffett family and the Goldring family.   Deal expected to close at end of Jan 2020.  Crescent Crown already services that territory with other brands, so this is basically vertical consolidation.  This is the 16^th MillerCoors distrib deal we’ve reported in 2020; several more in works.  Definitely an above average year for distribution deals.

Crook & Marker sent response to article we printed yesterday from chief sales officer Ray Faust:  “From the very beginning, we’ve said that Crook & Marker is more than just another hard seltzer. We’re establishing a full portfolio of ‘better for you’ alcoholic beverages,” he reminded, “providing quality ingredients, transparency and bold flavor consumers can trust.” He added: “We believe this category is poised for enormous continued growth if there is sufficient variety to keep consumers engaged and excited by both the flavor and ingredient label of what they’re drinking.”

Ray also offered comments on right of first refusal: “The right of first refusal documents are a common step in introducing new product lines and are always done in the spirit of partnership,” said Ray.  “The timing for these letters to distributor partners in four states is being driven most of all by retailers who want our Spiked Soda innovation in January. We’re proud of our ability to move quickly and work with our distributor partners to meet retailers’ needs and take the next step in establishing Crook & Marker as a true portfolio.” 

After just 2 yrs, FIFCO USA will get a new ceo again.  Adrian Lachowski will officially leave FIFCO on Jan 15 and take a 3-month sabbatical, perhaps rejoining FIFCO down the road.  New ceo will be named before holidays and he has US alc bev experience, INSIGHTS understands. Prior to FIFCO USA, Adrian “successfully headed” Costa Rica’s beer and RTD biz “transforming the business,” sez FIFCO USA release.  Once again, US proved a tuffer nut to crack. 

FIFCO sez this was only meant to be a shorter-term gig for Adrian. “When I first talked to Adrian about this opportunity, we agreed that the assignment would conclude around the 2-year mark,” said FIFCO ceo Ramon Mendiola.   In US, Adrian “contributed toward building the necessary foundations for the future of the company.”  But so far, FIFCO hasn’t been able to accomplish the major transformation it seeks in US, the doubling it talked to distribs about, or even growth.   FIFCO USA volume down 420K bbls, 15% since it bought NAB in 2012.   FIFCO USA volume down 1.4% in Nielsen all outlet thru Nov 30, while $$ up 1.9%.  FIFCO has a very strong and profitable biz in Costa Rica, ceo Ramon is a leading proponent of triple bottom line philosophy, and its US biz has potential which so far has proved difficult to actualize.   

“The Healing Organization”; New Book With Chapter on FIFCO and Ramon  A new book called The Healing Organization, Awakening the Conscience of Business to Help Save the World features a chapter on FIFCO and its ceo Ramon Mendiola.  Book is written by Raj Sisodia and Michael Gelb. Raj previously coauthored influential book called Conscious Capitalism with Whole Foods founder John Mackey.  Chapter on FIFCO calls it “one of the world’s great examples of a Healing Organization.”  The chapter is entitled “Bringing More Pura to the Corporate Vida.”  FIFCO “has transformed so that it not only stopped polluting their national treasure, but is now actively protecting it, while also showing other businesses around the world how to make more money by being better stewards of… Mother Earth.”  The prologue of this book was written by Tom Peters, one of most famous business writers, especially for In Search of Excellence (a long time ago) in early 80s.  He sez the Healing Organization is “going to be a classic” and is a “masterpiece.”  Over the top?  Perhaps.  But worth a check.

Antitrust watchdogs in US and Australia continue to scrutinize and force changes in alc bev deals. Constellation’s delayed sell-off of lower-priced wines to Gallo got tweaked due to FTC “areas of competitive concern primarily related to the Sparkling Wine, Brandy, Dessert Wine and Concentrate categories,” the companies reported today.  Lotsa moving pieces, and deal expected to close by end of STZ’s fiscal 2020, but key changes in new agreement: 1) Constellation will keep handful of brands in those categories for now, tho it will pursue other oppys to sell ’em off; 2) new deal is for $1.1 bil, significantly lower than original $1.7 bil price tag; 3) Gallo will purchase STZ’s Nobilo Wine in New Zealand.  While $600-mil price difference quite a haircut, analyst Brett Cooper at Consumer Edge figures that with addition of Nobilo deal and assuming STZ can get same price for withheld brands elsewhere, “we arrive at a total sale that is about $200-$250m lower than the original price (12%).”  This development not surprising, Brett observed, but “it isn’t great news either” and deal “less attractive than it was at the outset.”  Moreover, Brett expects more wine divestments from STZ.  Indeed, he would not be surprised to see Constellation “offload the remaining business in the future,” due to the markets’ “skepticism” about its “ability to brand wine.”  (Constellation execs certainly talk differently about success of their “power brands.”)  As result, “the stock doesn’t discount low to mid-single digit wine & spirits sales growth and 30% operating margins.  We believe that the market needs to see green shoots here to have confidence.” 

On the other side of the world, the Australian Competition and Consumer Commission (ACCC) has issues with the proposed ABI-Asahi deal in both cider and beer.  Asahi would end up with about 2/3 of cider biz, so a brand divestiture likely.  In beer, concern is less and may not require divestiture, Bernstein’s Euan MacLeish points out.  But “worst likely case is that Asahi offers to give up the distribution of ABI’s Beck’s and/or Stella/Bud/ Hoegaarden brands.”   That would resolve any mkt concentration issues, Euan sez, and have little profit impact.  On other hand, if Asahi has to give up distribution of Corona, “this would likely be a dealbreaker.”  In any case, “Asahi and AB InBev have to negotiate the price again,” Morningstar’s Jeanie Chen told Reuters.

These announcements suggest a coupla things.  First, antitrust regulators continue to look closely at these alc bev deals, perhaps a little more closely than in past, tho ABI has certainly done divestitures before to get deals done. Recall, Express reported yesterday that Calif AG expressed concerns about biz consolidations in that state, tho without specific reference to distrib consolidations there.  Speaking at Beer Insights Seminar last mo, alc bev atty Marc Sorini pointed out that with FTC having blocked RNDC-Breakthru deal, wine and spirits distribution biz has reached “the terminal consolidation point.  I think beer will start getting there,” Marc added, especially since in most territories, “you’ve already got largely a duopoly.”  Finally, in wake of Constellation’s massive haircut in Ballast Point selloff and headwinds to $4-bil Canopy investment, add in this diminished deal with Gallo and STZ lookin’ a bit less invincible these days.