If you are a certain age, you might find it as hard to think of marijuana as a mainstream business dominated by New York Stock Exchange companies as it is for you to think of esports being played in sold-out arenas, with corporate sponsorships and bidding battles for broadcast rights.
Brace yourself. The corporate mainstream is where the legalized marijuana industry is headed. Notwithstanding a recent New York Times report that Wells Fargo bank closed the campaign account of a candidate for Agriculture commissioner in Florida because she reported receiving money from lobbyists for the medical marijuana industry, the future of the industry is in the aisles of your grocery store.
{mosads}Constellation Brands, an NYSE company that distributes Corona beer and Robert Mondavi wines, is investing $4 billion in a Canadian grower of legal marijuana that itself is a NYSE-listed company.
Constellation has the option to invest more and take control of Canopy. Molson Coors (also a NYSE company) has a joint venture with another Canadian marijuana company.
The deals are Canadian deals because Canada is a pioneer in legalization. Recreational marijuana in smoked form becomes legal this October. In October 2019, the beverage and edibles forms become legal. (Contrary to popular belief in a few states, marijuana sale and use remains illegal under U.S. federal law.)
The two deals give us signals regarding the paths the industry will take. They point to an industry that will be dominated by big companies that have deep experience in branding and deep pockets to fund branding campaigns.
The big players will be companies that also have distribution operations that are broad and efficient and whose costs are absorbed by a wide assortment of products. Smaller companies cannot afford to duplicate those operations and would have to absorb the costs over a small line of products.
The big companies that will dominate the industry are likely to be in the alcoholic, carbonated or energy beverages industry or in tobacco. They are the companies that have the distribution and branding prowess.
The tobacco and alcoholic beverages companies already push products that are age-regulated and seen by some people as sinful. Both have endured pressure on institutional investors to divest their stocks.
The carbonated beverage giants already have branched into drinks that the public views as less unhealthy than sugar-laden soda.
If it seems odd to think of marijuana-infused beverages as being seen as healthy, consider the possibility that they could be marketed as having less sugar and fewer calories than wine or liquor. There are no zero-calorie wines or liquors, and, for chemical reasons, there may never be any.
There probably will be differentiated markets for smoked versus imbibed marijuana because (I am told) the products have different characteristics in terms of the onset and duration of their effects.
The beverage market probably is bigger because more people are willing to sip a marijuana-infused beverage than are willing to inhale any kind of smoke.
Constellation and Coors did deals with smaller companies, but in the future, the large companies that move into the industry are more likely to develop their own brands than to pay big premiums to acquire entrepreneurial companies.
The smaller companies don’t have brands worth paying a high premium to acquire, and unlike entrepreneurial companies in high technology or biopharmaceuticals, they don’t have strong patents on critical assets or own critical know-how that would take a bigger company a lot of time and money to duplicate. Constellation’s stock price took a 9-percent clobbering when the company announced its deal.
Entrepreneurs took the early risks, but with a product that will be just another mass-market beverage or smoking product that big companies can produce on their own, the entrepreneurs should not count on selling their companies and making a fortune.
The good news for a few of the entrepreneurs is that, early in the transition to the mass market, some of them will be acquired at prices that make them rich. The bad news is that most of them will not.
In the end, the companies that currently dominate the carbonated, energy and alcoholic beverage markets are likely to dominate the marijuana-infused beverage market. The tobacco industry incumbents are likely to dominate the smoked marijuana market.
If U.S. federal law removes marijuana from the list of controlled substances, we could quickly see “Budujauna Light” and “Pepsi Jane” in the beverage aisle of our grocery store and “Marlboro Really Specials” behind the counter of the convenience store down the block.
Erik Gordon is a clinical assistant professor at the University of Michigan’s Ross School of Business. His areas of interest are entrepreneurship and technology commercialization, venture capital, private equity, mergers and acquisitions and corporate governance.