By Canadian Press

Molson seeks to disrupt beverage industry with cannabis-infused joint venture

Aug 1, 2018 | 3:22 PM

TORONTO — Molson Coors Canada is seeking to disrupt the country’s beverage industry by entering into a joint venture to develop non-alcoholic cannabis-infused products that could give it a leg up as more countries legalize the narcotic.

The business arm of Molson Coors Brewing Co. said Wednesday the venture with The Hydropothecary Corporation, now branding itself as HEXO, will be a stand-alone startup with its own board and management team, with Molson Coors Canada having a 57.5 per cent interest and HEXO holding the balance.

“While we remain a beer business at our core, we are excited to create a separate new venture with a trusted partner that will be a market leader in offering Canadian consumers new experiences,” said Molson Coors Canada president and CEO Frederic Landtmeters.

Although the impact of cannabis on beer consumption is unproven and difficult to evaluate until legalization takes place, the brewer believes consumer acceptance of cannabis and cannabis beverages is going to increase.

“We believe, potentially, it’s got really significant potential and we’re going to learn a lot and if other markets start to open up in due course and this becomes federally legal then we’ll be in a good place at that point in time,” Molson Coors CEO Mark Hunter said during a conference call about its second-quarter results.

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He said there are no plans to sell beverages to U.S. states that have legalized cannabis.

The hundreds of active molecules in the marijuana plant can be transformed into various products beyond just ones that give a buzz, said Hexo CEO Sebastien St. Louis.

“We’re going to start with THC but also CBD and then CBG. There’s a lot of these molecules that could do different things so it’s not only about disrupting in the psychoactive market but also in going into wellness markets, appetite control and all sorts of other interesting markets,” he said in an interview.

Beverages developed by the joint venture could be non-alcoholic beer. But other beverages are possible because the active substances don’t confer any odour or flavour and don’t alter the colour or clarity.

“And so the joint venture’s management will really be free to understand consumer preferences and craft a product offering to respond to them. So you can imagine the possibilities are pretty limitless,” said St. Louis.

The global market for legal and illegal cannabis is estimated at around US$150 billion, including US$7.8 billion in Canada this year, says Euromonitor International.

“There is a paradigm shift underway and cannabis has the potential to provide answers to the alcoholic drinks industry’s existential questions,” said Spiros Malandrakis, head of alcoholic drinks at Euromonitor International.

He said the marijuana industry could fuel alcohol’s next growth cycle or instead suffocate an industry already on the defensive.

Beer and alcohol companies are circling Canadian marijuana companies amid falling beer consumption and concerns that the buzzy and soon-to-be legal drug could take a further bite out of booze sales.

In May, marijuana producer Aphria Inc. said it has reached a deal that will see Southern Glazer’s Wine & Spirits to become its exclusive distributor of recreational cannabis products in Canada.

Edmonton-based Aurora Cannabis Inc. announced in February it would buy a 20 per cent stake in retailer Liquor Stores N.A. Ltd., which changed its name last week to Alcanna Inc. to reflect it now has alcohol and cannabis divisions.

Canopy Growth Corp. reached a deal last fall with Constellation Brands that saw the alcohol supplier invest $245 million for a 10 per cent stake in Canopy.

Recreational marijuana is set to become legal in Canada on Oct. 17, but edible products infused with pot — including beverages — will remain illegal until specific government regulations are rolled out in 2019 at the earliest.

HEXO is based in Gatineau, Que., and currently has more than 27,000 square metres (300,000 square feet) of production capacity with an expansion more than three times that size to be completed by the end of the year.

Its stock closed up 11.03 per cent or 0.48 cents to $4.83 on the Toronto Stock Exchange. Molson Coors shares closed up 4.92 per cent or $4.50 at $96.01.

Meanwhile, Molson Coors reported that it earned US$424.1 million or $1.96 per diluted share in the second quarter. That compared with US$329.9 million or $1.52 per share a year earlier.

Excluding one-time items, underlying profits rose 10.6 per cent to US$406.1 or $1.88 per share, five cents above analyst expectations according to Thomson Reuters Eikos. That was up from US$367.1 million or $1.70 per share in the second quarter of 2017.

Revenues for the period ended June 30 slipped to nearly US$3.1 billion, slightly below expectations.

Companies in this story: (TSX:TPX.B) (TSX:HEXO)

Ross Marowits , The Canadian Press