Can Tilray successfully synergize its cannabis, alcohol businesses?

September 11, 2023 ·

With its right hand, Tilray Brands has consolidated a swath of the Canadian cannabis market, most recently buying Hexo Corp. in its quest to grow market share.

With its left hand, Tilray has gone on a beverage alcohol acquisition bender in the United States.

After several alcohol acquisitions that turned Tilray into one of the largest U.S. craft brewers, the company recently announced an $85 million deal to acquire eight craft beer brands from brewing behemoth Anheuser-Busch InBev.

As the dust settles on Tilray’s latest alcohol purchase, a question lingers for investors: Will the company be able to build meaningful ties between its cannabis business and its alcohol operations, in accordance with statements made by company management?

For now, cannabis remains Tilray’s biggest business in terms of revenue.

During Tilray’s August conference call explaining the Anheuser-Busch transaction, CEO Irwin Simon said the company’s pro-forma revenue of about $860 million includes:

  • 30% beverage alcohol.
  • 30% Canadian medical and adult-use cannabis.
  • 30% European medical marijuana distribution.
  • 10% food and wellness.

Diversifying beyond cannabis

Proponents of Tilray’s strategy see promise in the company’s diversification into alcohol.

“First, obviously there’s the potential upside in craft beer itself, and even spirits, where they’ve moved into as well,” especially since some big players such as Anheuser-Busch are focusing less on craft beer, said Owen Bennett, senior vice president of equity research at New York-based financial services company Jefferies.

“And then, second, you’ve got what it can do from a cannabis value-creation perspective. … It is allowing marketing and brand equity-building among mass-market consumers ahead of any (federal) legalization,” Bennett said.

Tilray skeptics, on the other hand, might argue that the company has lost its focus.

In news releases, Leamington, Ontario, and New York-headquartered Tilray has taken to describing itself as “a global cannabis-lifestyle and consumer packaged goods company.”

“I don’t know what a lifestyle company is,” said Rob McPherson, a CPG veteran and former president of Bacardi Canada who has criticized Tilray management.

“Last time I looked, everything is a lifestyle and anything is a lifestyle.”

Tilray did not respond to MJBizDaily requests for comment on its alcohol strategy.

Linking alcohol distribution with cannabis

Tilray management has cited potential for cost synergies between its Anheuser-Busch beer acquisitions and its existing beverage alcohol brands.

Beyond that, however, Tilray has spoken of potential distribution synergies between Tilray’s alcohol and cannabis businesses in the event that the U.S. legalizes marijuana federally.

In the August conference call, CEO Simon asked: “Ultimately, upon (U.S. federal marijuana) legalization one day, is there the opportunity for adjacencies in the THC and CBD world, and having that distribution system, having those manufacturing facilities?”

“Again, we’re not dependent upon it,” Simon continued.

“But there’s a lot of great companies that have been built around the beer category.”

“I think it is the most obvious way for them to leverage these beer investments,” said Vivien Azer, managing director and senior research analyst for New York-headquartered financial-services firm Cowen.

Azer said that the alcohol industry has been lobbying for marijuana to be regulated along the same lines as spirits – in a three-tier system of producers, distributors and retailers.

But potential synergies between Tilray’s existing alcohol distribution network and a hypothetical, future U.S. marijuana distribution system are just that – hypothetical – and would depend on the actual details of any federal legalization law.

McPherson, the former Bacardi Canada executive, pointed out that alcohol distribution “lives at the state level, not at the federal level, so each individual state can have its own individual definition of distribution.”

Given complex state-by-state differences, McPherson suggested that Tilray’s ability to shoehorn marijuana distribution into the existing U.S. alcohol distribution system is by no means assured.

“I think it would be naive to assume that that will happen – and that it will happen at that pervasive level. … Cannabis is going to be complex enough,” he said.

“And you layer that complexity into the already-complex distribution system for beverage alcohol – it’s just nonsensical.

“But it sounds really good if you say it.”

Connecting alcohol, cannabis brands

Aside from a distribution link between cannabis and alcohol, Tilray’s C-suite has hinted – albeit sometimes indirectly – at a more ambitious synergy: linking alcohol brands and consumers with cannabis products in one way or another.

In 2020, after Aphria acquired SweetWater Brewing Co., then-Aphria Chief Financial Officer Carl Merton (now CFO of Tilray Brands after Tilray and Aphria merged) told MJBizDaily that the Atlanta-based craft brewer offered “an incredible reach to a consumer that is already thinking about cannabis, and this acquisition allows us to access that consumer years in advance of federal legalization.”

Similarly, in its late 2022 announcement that it had acquired New York-headquartered Montauk Brewing, Tilray cited plans “to leverage our growing portfolio of U.S. CPG brands and ultimately to launch THC-based product adjacencies upon federal legalization in the U.S.”

Consumers will eventually “see beer with THC in it in the U.S.,” Tilray CEO Simon said on a January 2023 earnings call.

“One day, you’ll see spirits with THC in the U.S.,” he added.

It’s not clear whether Simon meant such beverages would contain both alcohol and THC or only THC.

Tilray has also started experimenting with bringing one of its Canadian adult-use cannabis brands, Good Supply, into the U.S. beer market: Good Supply-branded light beer launched in Connecticut, Georgia and New York in June, with the promise of further launches in Massachusetts and Rhode Island.

On the August conference call, Simon said that “when federal cannabis legalization occurs, (Tilray) will be able to include THC-based products in our beverage and wellness portfolio as well.”

The exact details of how Tilray might align THC with its non-cannabis brands remain a mystery.

However, U.S. beverage alcohol companies are already “pushing the boundaries around brand transferability” within alcohol, observed Cowen’s Azer – for example, the beer brand Coors offers a Coors seltzer product, and the Truly Hard Seltzer brand sells Truly-branded vodka.

“But we don’t have any strong analogues in terms of brand transferability between cannabis and alcohol.”

Tilray is clearly bullish on marijuana drinks, given its recent purchase of the remaining interest in its Truss cannabis drink joint venture from Molson Coors Canada.

Analyst Bennett believes many new cannabis consumers are likely to enter the segment via beverages, since they’re familiar with the format.

“I think having an established beverage presence with existing alcohol consumers that trust the brand should position Tilray to really drive maximum upside from these dynamics, relative to pure-play cannabis companies that are looking to expand into the beverage space,” Bennett said.

On the other hand, skeptics point out that any Tilray plan to link alcohol and marijuana brands in the U.S. after federal legalization hinges on an event that has not yet occurred.

“The first thing that has to happen is, the U.S. has to actually federally legalize – when that’s going to happen is anybody’s guess,” said McPherson, the former Bacardi Canada president.

McPherson pointed out that federal adult-use legalization took years even in Canada, where Justin Trudeau’s Liberal government had a parliamentary majority (and a specific campaign promise surrounding cannabis legalization).

Even in the event that Tilray does extend its alcohol brands into cannabis, McPherson suggested that wouldn’t necessarily be a slam dunk.

“There’s efficiency and there’s effectiveness, and a lot of brands go the efficiency route,” he said, “and you start to see the same brand name playing across multiple categories because it’s efficient: ‘There’s an existing level of consumer awareness, so we’re going to try to leverage that.’”

But branding efficiency can lead to reduced brand effectiveness, McPherson argued, “because you’ve had to cut a wider swath, you’ve had to make more compromises, you’ve had to shave off a lot of the sharp edges that end up catching consumers’ attention.”

Even if crossovers between Tilray’s alcohol brands and cannabis never play out, the alcohol assets have stand-alone value.

Cowen’s Azer said that Tilray’s beer and liquor acquisitions give it “exposure to the U.S. alcohol segment, which generally grows at a mid-single-digit (compound annual growth rate).”

Analyst Bennett acknowledges that Tilray receives “some criticism that they’re diversifying out of cannabis.”

“But No. 1, they’re very open that they’re no longer a cannabis business,” he said.

“No. 2, as a shareholder, all you should really care about is, is this company generating value? And are they sticking to the strategy they lay out to investors?” (Full Story)

In categories:Business Drinks International
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