Is Coca-Cola Brewing A Cannabis Partnership?

by Trefis Team
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The Coca-Cola Company (NYSE:KO) is the latest beverage giant mulling an entry into the marijuana space. According to a report in BNN Bloomberg, the company is in “serious talks” with Aurora Cannabis (TSE: ACB) to develop cannabis-infused beverages. Although the world’s largest beverage company released a statement saying it had no interest in marijuana, it did say that it is keeping a close watch on the use of non-psychoactive CBD (cannabidiol) as an “ingredient in functional wellness beverages.” CBD is the chemical in cannabis that is often used for medical purposes, while THC (tetrahydrocannabinol), which is also used for treating some conditions, produces the high. This is a move away from the previous deals in this segment, between pot producers and alcoholic beverage companies, which are aimed at making drinks that would give a high to consumers. Nevertheless, this is a highly lucrative market, and may be extremely beneficial to a company that has been facing sluggish soda sales.

We have arrived at a CAD 12.50 price estimate for Aurora Cannabis, which is higher than the current market price. We have created an interactive dashboard analysis on Our Outlook For Aurora Cannabis In FY 2019 (year ended June 30, 2019). If you disagree with our forecast, you can make changes to these variables to arrive at your own price estimate for the stock.

Taste The Happiness Soon?

Sales of sugary, carbonated beverages have been on the decline for a while now, with consumer preferences tilting towards more healthier options such as teas and flavored waters. Diet drinks, which were once considered healthy, have received a lot of flak with increasing concerns about the dangers of artificial sweeteners. Consequently, Coca-Cola has been dealing with the growth of its beverage business slowing down. Hence, an entry into this space may help to offset the drag on their revenues by introducing cannabis-infused drinks. As per the report, the two companies intend to introduce cannabis-laced beverages that will ease inflammation, pain, and cramping. According to BDS Analytics, a leader in cannabis market intelligence and consumer research, cannabis-infused beverage sales increased to $35.6 million in 2017 across California, Colorado, Oregon, and Washington, with robust growth reported across the states. This supports Coca-Cola’s decision to foray into this highly appealing market.

Besides Coca-Cola, a number of other companies, particularly alcoholic beverage makers, are reportedly interested in this space. In August, a massive $4 billion (~CAD 5 billion) investment by alcoholic beverage giant Constellation Brands (NYSE: STZ) into pot company Canopy Growth Corp. was announced. Moreover, beer maker Molson Coors has tied up with Hydropothecary to develop marijuana-infused drinks in Canada, while Heineken has already launched a THC-infused sparkling water in California dispensaries. Meanwhile, reports have also emerged regarding Diageo‘s (NYSE:DEO) interest in entering the cannabis space.

We have a $52 price estimate for Coca-Cola, which is higher than the current market price. The chart below has been made using our new, interactive platform. The various driver assumptions can be modified by clicking here for our interactive dashboard on Our Outlook For Coca-Cola In FY 2018, to gauge their impact on the earnings and price per share metric.

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