Some global beverage makers are taking a close look at Canada’s legal marijuana industry as they weigh the possibility of getting into the business.

Officials from Anheuser-Busch InBev SA/NV, Pernod Ricard SA, Heineken Holding NV, Coca-Cola Co. and Diageo PLC are among companies that have been making the rounds with legal cannabis producers, meeting executives and touring their facilities, according to sources familiar with the matter.

The rise of a legal cannabis market has stoked fears among brewers and soft-drink makers that marijuana will dent already declining or stagnating sales. On the eve of legalization in Canada, some of these companies are trying to understand the potential shift in consumer behaviour and avoid being left behind.

While the meetings began months ago, the beverage industry’s interest in marijuana has been in the spotlight since Constellation Brands Inc. announced earlier this month plans to take a big position in Canopy Growth Corp., saying it would invest $5-billion in Canada’s most valuable cannabis producer. That deal came on the heels of Molson Coors Canada announcing a joint venture with Quebec cannabis producer Hydropothecary Corp.

The Constellation deal raises the stakes for rivals that have been circling the cannabis industry for months as a band of major players in the food, consumer goods, pharmaceutical, tobacco and asset-management sectors join them on the touring circuit.

Pot stocks have been on fire since the Constellation announcement two weeks ago, making it even harder for them to justify their lofty valuations. Since mid-August, shares of Cronos Group Inc. have soared 87 per cent, while Tilray Inc. is up 77 per cent, Aurora Cannabis Inc. is up 45 per cent, Aphria Inc. is up 42 per cent and CannTrust Holdings Inc. is up 30 per cent.

Sources familiar with the discussions between marijuana companies and beverage makers cautioned that another major deal with any of the beverage firms is not imminent.

Nevertheless, various beverage companies are considering their options. “I can assure you that we’re watching developments very closely and assessing what actions, if any, will be right for our business,” Patrick O’Driscoll, chief executive officer of Corby, a Canadian division of French spirits giant Pernod, told a conference call last week.

With the Oct. 17 legalization of recreational cannabis in Canada approaching, many beverage companies are looking for new ways to bolster their slow-growing business. Big brewers are looking to stem falling sales and not miss out on the next big thing, like many did with female drinkers, craft brews, cider and seltzer, said Vivien Azer, an analyst at Cowen Inc. As well, alcoholic drink companies struggle with the spectre of possibly losing market share to cannabis firms. And the beverage companies don’t want to be beat by rivals on a potentially new lucrative stream of revenue.

In North America, sales of mid-priced beers dropped 12.5 per cent to US$37.3-billion last year from five years earlier, and are forecast to tumble another 14.3 per cent to 2022, according to market researcher Euromonitor. North American soft drink sales were relatively flat between 2012 and 2017, at US$76.4 billion last year, and expected to slip 3.8 per cent to 2022, Euromonitor found.

“For the alcoholic sector, the stakes are pretty high and they know it,” said Sylvain Charlebois, dean of the University of Dalhousie’s management faculty. “That’s why they’re moving first.”

But one of the chief questions for beverage firms is whether they even need to invest in or acquire an unproven Canadian marijuana startup to get into the space and what their risks – legal, reputational, financial – would be if they did. The sources said a small equity investment in a company was a more likely entry option than a full takeover.

Meanwhile, product innovation that would pique the interests of big beverage, food and consumer goods companies has been limited in Canada by regulation. The rules for edibles and beverages have yet to be written in Canada and the drug is still illegal at the federal level in the U.S.

The continued focus on deal-making in the nascent cannabis sector is coming at a time when growers cannot afford any operational missteps. Internally, producers are working to fulfill the initial purchase orders they have received and gearing up to deploy their sales teams to promote their products at the retail level and be gunning for the next orders to keep the cash flows moving.

“There are still a lot of questions about the state of these companies that we’ve put a lot of value into,” said John Kaden, chief investment officer at New York’s Navy Capital LLC, an investment firm that specializes in cannabis.. “We’ve never had a meaningful quarter yet.”

Beverage companies have been reserved about commenting on their interests in cannabis. Corby’s Mr. O’Driscoll said “at this moment I think it’s difficult to say what the impact will be” of the legalization of recreational cannabis on the beverage alcohol industry and consumer consumption behaviour. But he said the company is closely watching developments in the cannabis world. Pernod didn’t return an e-mailed request for comment.

Coca-Cola spokeswoman Shannon Denny said the soft-drinks maker is not working on any initiatives in the cannabis space. Heineken offers cannabis-infused sparkling water in its Lagunitas brand. The product is a joint venture with CannaCraft, a producer of cannabis-based products in California, and “the latest result of Lagunitas’ off-the-beaten-path experimentation,” said a spokeswoman, who did not address Heineken’s broader marijuana strategy.

A spokesperson for Diageo said the company doesn’t comment on speculation and that it is “monitoring this space closely.”

AB InBev spokeswoman Aimee Baxter said it is “closely following the legalization trends in the cannabis industry. There are still many unknowns regarding the long-term commercial and societal impacts of marijuana legalization. It is our hope that the public health community and policy makers are examining this issue carefully so that marijuana is regulated appropriately where it’s legal.”

The Globe and Mail, August 28, 2018