Constellation Brands, based in New York, owns numerous Napa Valley wineries — Mondavi, Franciscan, The Prisoner and many others — and is the second-largest wine and beer company in the United States with some 50 million cases of wine sold every year.
Recently, Constellation announced that it would pay $245 million for a minority stake in Canopy Growth Corp., a medicinal cannabis producer in Ontario, Canada, that trades as WEED on the Toronto Stock Exchange.
This is the first major alcohol company to dip its toe into the burgeoning cannabis market, and it signals a new direction for other wine companies to follow.
Acquisitions have historically been a primary driver of Constellation’s growth strategy, as is often the case with large businesses. However, in recent years, there has been very little room to gain significant market share through the purchase of wineries: Most of the larger ones have already been purchased or are otherwise unattractive, and although wine consumption continues to increase, the rate has slowed in recent years. Craft beer and spirit consumption has also slowed.
So what is an alcohol company to do? Enter a completely new market, such as the cannabis market. Contrasted with the rate of wine consumption slowing, the expected pot market in North America is expected to grow from a current market of less than $10 billion to more than $50 billion in fewer than 10 years, according to Bloomberg. To put this in perspective, sales of domestic wine were just under $40 billion in 2017.
Why did Constellation purchase a pot-growing company in Canada and not one in the United States? There are a few reasons, but primary in their rationale must have been Canada’s expected plans to legalize recreational marijuana by July 2018.
This is in contrast to the United States, where cannabis is still considered at the federal level a Schedule 1 drug, possession of which can result in a prison term. However, it’s medically legal in more than 20 states, including the District of Columbia, with eight states already allowing recreational use and more expected in the future.
From a strict business-strategy standpoint, Constellation’s purchase of Canopy should have been predicted. Many alcohol companies were already noticing that beer sales were slowing in states where recreational pot was legal, with contagion to wine sales certainly a possibility.
The purchase will allow Constellation to get a leg up on all other businesses hoping to enter the market when pot does become legal in the United States, using the Canada market as a testing ground for how to best engage new and existing customers in what some people are now calling “the relaxant” marketplace. According to the company, the testing will include exploring pot-infused wines.
Will pot become legal throughout the United States?
Hold your horses, you might be thinking. Weed will never become legal at the federal level. Maybe, but according to a recent Gallop poll, whereas just over 10 percent of Americans favored legalizing marijuana in 1964, in 2016 that percentage had risen to 64 percent, including 51 percent of Republicans and nearly 80 percent of those between the ages of 18 and 34.
Damned if you do, damned if you don’t
Sonoma County has been gearing up for increased permits to grow and sell pot for the last couple of years, whereas Napa County has taken what seems like a reluctant wait-and-see approach. One might imagine what it would be like if Napa were to put a ban on cannabis production and sales while its near neighbor maintains its open-door policy. If that’s the case, then we will all witness an experiment with market forces.
For example, let’s say weed becomes legal in the United States but is not allowed to be grown in the Napa Valley. Fine. Let’s do some math. One acre of land can produce about 3 tons of high-end Cabernet Sauvignon grapes per year. So a grower sells her Napa Cabernet grapes at the 2016 average price of $6,943 per ton. She makes more than $20,000. Not bad. However if her friend over in Sonoma farmed a similar acre of pot, she could make at least 10 to 100 times that amount, according to estimates.
The terroir of weed
You might think because of supply and demand the price will not be so dramatically different between grapes and pot in the future because lots of places will grow weed. But living in wine country you know a little bit about the value of terroir. Without competition from Napa, would Sonoma or Mendocino become the new “Napa” for premium pot growing in California, keeping those prices high?
Once it’s legal to sell in the U.S., Constellation would be the first to sell pot-infused wines — maybe through its non-Napa-based brands, but who beyond our region knows the difference between “Robert Mondavi” Napa winery and heir “Robert Mondavi Private Selection,” which is a Central Coast brand?
Beyond the confusion in the marketplace, the difference in revenue streams will drive labor away from strict grape-only regions into those that grow weed. And if Napa holds the line on a grape-only policy, what will happen to its tourist base? With nearly 80 percent of young people favoring legalization, where will they tend to support? Will they consider a place that does not allow wide pot use as archaic and old-fashioned?
Ever try to smell the nuances of wine at a Grateful Dead concert?
There are plenty of hurdles: health warnings, how pot products will be distributed, will consumer sentiments fade? Nevertheless, we should expect a wide range of companies to begin dipping their toes into the marijuana market (and many jumping in completely), each attempting to navigate the tricky regulatory purgatory of what currently is a semi-legal business within the United States.
Companies that enter will be those that currently produce other intoxicants, such as wine, beer, spirits and tobacco, but will also include other sectors and plenty of investors — venture-capital firms, private-equity and mutual-fund managers — all looking to cash in on what is being called the Green Rush.
Of course, like all gambles, many of these first adopters will fail, while a few will become rich beyond their wildest dreams. I hope we can find balance and moderation as we head into a foggy future, where the smell of pot smoke will waft skunk-like from nearly every boardroom, if not from every winery.
What I’ll be watching next is if Gallo, Trinchero or Jackson Family Wines will take the next toke.