Things weren't supposed to turn out this way for Constellation Brands (NYSE:STZ). The company's investment in Canopy Growth (NYSE:CGC) was intended to generate strong growth while diversifying the company's business.
Unfortunately, Constellation Brands has seen loss after loss from the cannabis producer pull down its results. While some growing pains were inevitable, there's not much light at the end of the tunnel. Investing in the cannabis industry has been an expensive $4 billion bet for Constellation Brands, one that the company may want to consider walking away from sooner rather than later.
Another quarter weighed down by cannabis losses
Constellation Brands reported its third-quarter earnings earlier this month, which offered no surprises for investors: Canopy Growth dragged down the company's results, yet again. Although Constellation reported a profit of $366.5 million in Q3, the beer maker still incurred a loss of $71.1 million relating to its investment in the Canadian cannabis company.
Unfortunately, this is not a new problem, as a lack of profitability has been a recurring issue for Canopy Growth. In July 2019, Canopy Growth fired co-CEO Bruce Linton after another disappointing quarter dampened Constellation's numbers. The move rocked the industry and, even though Linton has since moved on, Canopy Growth continues to incur losses.
Over the past four quarters, the cannabis operator has accumulated net losses totaling 1.9 billion Canadian dollars on revenue of just CA$344 million. There's little hope of improvement around the corner as the company is bogged down in overhead and administrative costs. Selling, general and administrative costs totaled CA$241 million last quarter, which was more than triple the company's top line of CA$77 million.
There's a lot to fix at Canopy Growth, and what was initially an exciting investment in a new industry is looking like more and more like a burden on Constellation Brands.
Constellation is bullish on the Canadian marijuana market, but it shouldn't be
Despite the painful results, Constellation Brands isn't showing any signs that it's throwing in the towel on Canopy Growth anytime soon. The company's CEO Bill Newlands said, "We remain bullish on the Canadian cannabis market as the conversion of the illicit market to the legal market continues to strengthen."
It's been more than a year since recreational pot use became legal in Canada on Oct. 17, 2018, but there's not a whole lot to be bullish about today. Data from Stats Canada suggests that less than one-third of cannabis users buy pot from legal sources. Although that figure will likely rise as more cannabis stores pop up, legal pot prices are still far more expensive than what users can buy from the black market. Numbers from October indicate that illegal pot was nearly half the price of what consumers would pay from a licensed cannabis retailer.
The reality is that while there may be some improvements in the Canadian cannabis market with edibles and ingestibles now becoming available, that's not enough to make it an appealing market in which to invest. Cannabis research company BDS Analytics adjusted down its forecast for the cannabis industry in Canada last year from a projected market size of $5.9 billion by 2022 to only $5.2 billion by 2024.
That's not a terribly high number when you consider that Green Thumb Industries CEO Ben Kovler expects that the recently legalized Illinois market alone can be worth as much as $3 billion. The California market is already worth more than $3 billion, and that's with a very strong black market still jockeying for position there.
What does this mean for investors?
Constellation Brands isn't going to say it's dumping Canopy Growth because it's been a horrible investment, even if it really believes that. Doing so would only send the marijuana stock down even further in price.
Instead, the takeaway for investors is that Constellation Brands will keep seeing its numbers weighed down by Canopy Growth for the foreseeable future, as there's little hope of a drastic improvement happening anytime soon.
Another takeaway is for the broader cannabis industry: Companies from other industries may be more hesitant to get involved in the cannabis industry in Canada in light of the challenges that have plagued Constellation Brands since its big pot investment. That means investors shouldn't expect any big deals to happen anytime soon involving beverages or any other industries.
Canopy Growth may well turn things around, but it could take a very long time for that to happen. In the meantime, Constellation Brands' stock is likely to remain on a very turbulent path, and investors ought to steer clear of it for now.
A few weeks into recreational cannabis sales in Illinois, supply of flower remains tight, which is forcing many marijuana retailers to limit the amount sold to any one customer.
That’s to ensure retailers can serve as many people as possible, and some shops even require adult-use cannabis customers to schedule appointments.
Illinois cannabis retailers are required to designate all inventory as either for medical marijuana or recreational customers upon receiving it – and they also must have at least a 30-day supply on hand at all times for MMJ patients.
Some of the tactics marijuana retailers in the state are taking to address this issue include:
• Designating Mondays for medical patients only.
• Implementing a reservation system for recreational customers.
• Curbing the amount of flower customers can purchase.
Medical patients first
Dispensary 33 in Chicago has limited supplies and hours are reduced for recreational users. Its website encourages customers to check out its Twitter and Instagram feeds for daily updates.
“We always have to make sure our patients have the inventory and product they need,” said Abigail Watkins, Dispensary 33’s marketing director. “We haven’t run out of any other products. We still have a whole assortment of edibles and topicals.”
Retailers have found balancing inventory between medical and recreational a big challenge.
One dispensary in Collinsville, Illinois, has reserved Mondays for MMJ patients only, according to reports from regional news outlets. Scheduling a spot
Dispensary 33 established a text message system that allowed recreational customers to check in when the store was ready to see them. However, that system caused people to arrive earlier and earlier so they could get a place close to the front of the line. Subsequently, Dispensary 33 implemented an online reservation system to mitigate lengthy waits.
Customers can log on and reserve a spot between noon and 4 p.m. or 4 p.m. to 8 p.m. and arrive anytime in the window they’ve scheduled. “We did that to accommodate different schedules and people who can’t stand for a long time,” Watkins said.
The online reservation system also enables Dispensary 33 to evaluate inventory and the product delivery schedule to determine how many recreational customers it can serve each day before cutting off the number of people who check in.
“One day, people are just going to be able to walk in. That’s ultimately the end goal,” Watkins stressed.
“But right now, I don’t think any dispensary in Illinois is able to do that. Some have waiting rooms. One dispensary also owns a bar, so that’s their waiting space, but then you’re sitting in their waiting space and you can’t leave.”
While flower is flying off the shelves at most Illinois dispensaries, many people are buying edibles and vape products, Chicago-based Green Thumb Industries (GTI) CEO Ben Kovler said.
GTI, which operates retail stores under both GTI and Rise brands, limited the amount of flower customers could buy so enough is available for everyone – and the shop was still able to accommodate customers who wanted to buy it on the second and third days of adult-use sales, Kovler noted.
“There’s also been a surprising amount of interest in topicals,” Kovler said. “What we’re seeing is a lot of people who are not in the medical program coming for various kinds of wellness (products).
“People are coming to improve their well-being, and it’s not just about getting high.”
One of the biggest challenges GTI faced on opening day was a shortage of badged employees – which are those approved by the state to work in the cannabis industry. The company has 82 employees awaiting badges with no time frame on when they’ll be approved, Kovler said.
“It should take a week or two,” he said. “It’s taking four to six weeks plus. It’s one of the biggest hiccups we’ve had.”
The company reported no issues with neighbors or parking. A nearby business park even took advantage of the number of adult-use marijuana customers looking for parking places, and sold VIP spots to customers for GTI’s Rise store in Mundelein, Illinois.
The store had 12 parking spaces when it opened and has since added 19. It’s planning to build a new parking lot with up to an additional 100 spaces.
Looking back, Kovler said GTI would have stocked up with additional food and coffee to serve the more than 1,000 people who came through its doors in Jan. 1, which was the first day Illinois allowed recreational marijuana sales.
Finding a balance
On opening day, Mission Dispensary on Chicago’s south side debated increasing the number of point of sales (POS) systems and cashiers available but determined that if it if did so, it would run out of product, said Kris Krane, president of Phoenix-based 4Front Ventures, which operates Mission.
Instead, the store put limits on how much customers could purchase, which the company has revised mainly downward since then. The shop started with a $300 total purchase limit, then dropped it to $200, before putting a limit on the products themselves.
“Every product class we have has a limit,” Krane said. “We reassess it based on inventory, and the limits change daily.
“We’ve had days where we’ve run out of edible products, but we still had capsules. One afternoon, we only had capsules, but the next day we had edibles back in stock.”
Also on opening day, Mission Dispensary toyed with how the line of customers moved through the facility. At one point, it had staff in the waiting room taking customers orders and entering them into a kiosk. Krane reported it turned out that took longer because the products are not taken out of inventory until they’re scanned, so often the goods would be sold out before the customer reached the checkout station. “Now we have someone in the back of the house where as soon as it’s picked out of inventory, the product is scanned immediately,” Krane said.
“It’s significantly shortened the time from when the order is placed to checkout.”
Margaret Jackson can be reached at margaretj@mjbizdaily.com
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