Could Cannabis Really be Bigger Than Beer?

J. Frank Sigerson  |



The past few years have been overwhelmingly positive for the emerging cannabis industry. After experiencing prohibition for nearly a century (and for all of the wrong reasons), the once infamous plant is finally seeing the light of day. The cannabis sector is on fire and predicted to see unprecedented growth.

Some say it’s the millennials pushing for change, while others argue it is the result of knowledge and better understanding brought about by the age of information. Whatever the case, one thing is for certain: The cannabis revolution is here and based on how the entire world is reacting to it, it’s not going away anytime soon.

As millennial tastes shift and the health risks of alcohol become more apparent we are seeing a demographic shift that could displace one of humanity's oldest industries. No, not prostitution, the alcohol industry.

Could the cannabis sector really be bigger than beer?

The short answer? Yes, it probably will be.

Let's step back a moment and take a look at the bigger picture. According to an estimate by CIBC World Markets Chief Economist Avery Shenfeld, Canada alone could be buying as much as $10 billion worth of marijuana products in a single year. That is $1 billion dollars more than the $9 billion Canadians spent on beer back in 2015.

According to Michael McLellan, who’s a financial consultant to the medical marijuana industry, “This is a 10-year, bull-market run. You’re creating a new legitimate legal business for what is going to be a $10-billion to $20-billion a year market.” Big alcohol brands like Molson Coors and Constellation Brands clearly agree. Spooked by declining beer sales Constellation Brands have made a $4 billion investment in Canopy Growth.

What this misses is that there is going to be an absolutely massive ancillary market. In Canada specifically legislation means that producers are unable to operate retail outlets. This has created space for emerging players like Choom Holdings Inc.  (CHOO:CNX),  (CHOOF). Choom is a premium cannabis retail brand focused on the many retail opportunities that the industry presents in the country.

Research from Cormark Securities highlights that most investor focus has been on licensed producers, resulting in retailers still being reasonably valued or even undervalued. Retail is the next big opportunity for investors.

Starting out as a full recreational play prior to Canada’s full-on legalization, Choom quickly saw an opening and adjusted its strategy towards pure retail. The company currently has 78 retail license opportunities with more on the way. Despite supply-chain problems Canadian cannabis producers are expected to outproduce demand, and this has shifted investor focus away from growers and towards retailers. This has put Choom in the perfect position to take advantage of a growing niche.

Of course, everyone expects hot competition where cannabis is legal, and Choom’s numerous retail opportunities and marijuana expertise will work to the company’s advantage. Regulations prevent licensed producers from vertical integration or owning chains, which has created a huge opportunity for retailers who won’t need to fight growers for market share. Large existing retailers from other industries have started to eye the cannabis sector with interest but they appear to be too late. Early adopters are already in control of the space, so latecomers will be forced to pay a premium to enter the market.

Choom has attracted the attention of some big players. Aurora Cannabis, one of the biggest marijuana companies active in Canada, invested C$7 million in Choom in June 2018 and an additional C$20 million in November 2018. Aurora's investments have provided financial backing in addition to raising Choom's profile, and, temporarily, Choom's stock higher last summer. While it faced all-time lows late last year, the stock has recovered by more than 20%, which indicates strengthening investor confidence. Choom needs to stabilize above the C$0.50 mark in order for us to turn bullish.

It’s not a question of if cannabis will be bigger than beer but a question of when. Investors are looking at a sector which literally has global room for growth and is in its infancy. Companies that are able to succeed in Canada will be the future Anheuser-Busch InBev BUD. Early investors in big cannabis companies have already seen incredible gains but these are now slowing as the field becomes increasingly crowded. The undervalued retail sector offers the next big opportunity for cannabis investors.

DISCLOSURE: I have no financial interests or connection with any of the companies mentioned in this article.


The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
CHOO:CNX Choom Holdings Inc - Ordinary Shares 0.43 -0.02 -3.37 284,998
CHOOF Choom Holdings Inc. - Ordinary Shares 0.34 -0.00 -1.26 344,296

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