This post originally appeared on Ben's LinkedIn Newsletter, Infused Insights. You can read and leave comments here.
Tilray Brands, Inc., which is already among the largest cannabis companies in Canada, has announced its merger with HEXO Corp. The combination of these two entities has resulted in them overtaking Canopy Growth as the largest cannabis company in Canada. However, the decision has been met with skepticism by some who view it as unwise, given the underwhelming financial performance of both companies. They fear that the merger will simply result in one larger struggling company.
They might be right.
Although, I suspect this may have been a decision that Tilray strategically made last year when they aligned with HEXO and loaned them money with the expectation that they'd drive towards cash flow positive in the months ahead. I wasn't in the room, so I couldn't tell you with certainty, but it's definitely something one considers when they're drafting the loan covenants as a market is heading into a recession -- the ol' loan-to-own.
But what's this have to do with infused beverages? Let's dive in.
Tilray's Cannabis Beverage Strategy
In late 2018, Tilray and AB InBev announced their partnership and invested $100 million to establish Fluent Beverages. A little over three years later and with little to show in the market, the two split-up in January 2022. While AB InBev kept the Fluent brand, Tilray kept the manufacturing equipment related to the production of CBD and THC beverages, the rights to co-pack for Fluent, along with a global license to use the technology developed by the joint venture. Despite the end of the partnership, Tilray indicated their commitment to the cannabis beverage industry and their intention to introduce new products in the future. Tilray would establish their alliance with HEXO a few months later.
As of recent, Tilray continues to invest significantly in its beverage sector, including the acquisition of Montauk Brewing Company . Putting the pieces together, it's easy to see Tilray building its distribution network that will be ripe for leveraging across North America post US legalization.
HEXO's Cannabis Beverage Strategy
Also in 2018, Molson Coors Beverage Company and HEXO Corp announced their joint venture, Truss, to pursue opportunities for non-alcoholic, cannabis-infused beverages in the Canadian market. At the time of the formation, Molson Coors Canada owned a 57.5% stake in Truss, with HEXO owning the remaining 42.5%.
Unlike the competitively positioned Fluent, Truss seemed to flourish from the perspective of bringing beverages to market and gaining marketshare in the category. Their headline brand, XMG, is often filling the top selling charts in the various provinces and Truss has held as high as 40% marketshare for the infused beverage category in Canada.
Despite a confusing announcement in late 2022 that HEXO and Molson Coors were ending their US CBD endeavor, their Canadian efforts seemed to remain very much intact.
Does this mean Tilray now owns 42.5% of Truss? That's an honest question, but for the sake of my take, we'll assume yes. (Please let me know if you hear otherwise)
Ben's Take
At this point, I feel it's reasonable to believe that the largest cannabis company in Canada, and one of the largest cannabis companies in the world, is now strategically positioned to dominate the beverage category in Canada, from manufacturing to retail shelves. At a time when Canopy is making significant reductions and going asset light by moving to a third-party sourcing model for cannabis beverages, Tilray seems to be making power moves to own the pipelines.
As a quick aside, I don't want to dismiss Canopy Growth Corporation's potential in the beverage category entirely. With Constellation's expertise in gaining market share through branded products, and the recent shuttering of their manufacturing and retail locations, Canopy will likely focus on that strategy. Leaning into the growth of successful products like Deep Space and Wana, Canopy can likely see a greater return on investment.
Many people in the US market like to discount the importance of the Canadian market, but there's a very active beverage category north of the border. Beverages in Canada have twice the categorical marketshare compared to their US counterparts, and the Canadian feds recently increased the purchase limits from 5 units to 48. Further, as Canopy has shown, there's a propensity for these large operators to start working their way south as soon as the lawyers deem it reasonably safe.
Following the acquisition of HEXO, I imagine there'll be some significant cost cutting and efficiency building within Tilray -- they did post a billion-dollar loss for their Q3 -- but with an optimization towards beverage. I don't imagine they'd be looking to cut a segment of of HEXO's business vis-à-vis Truss that has an outsized marketshare in a growing category that Tilray has previously committed to strategically.
Again, a lot of speculation. We'll see what I got right. What do you think?
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Ben Larson : 7/2/24 5:23 PM
Ben Larson