Are we overestimating the future profitability of cannabis?

According to the best information available about two to three percent of the global population uses cannabis-products regularly. A number that is still far below the consumption of alcoholic beverages, such as wine. Until recently marihuana was either illegal, or only available as prescription drug. But times are changing, last year we saw the first multi-billion dollar investment by one of the largest winery groups.

What Constellation Brand’s recent investment in cannabis company Canopy Growth tells us, is that they view wine and cannabis-derived products as the similar category’s. A view that might still be controversial in Europe but is gaining momentum fast. Today there is 20 countries that has legalised medical marihuana. Recreational use is more controlled and only fully allowed in Uruguay, Canada and nine states in the US. The strongest argument for the legalisation has been to tax the drug and prevent vast amounts of money entering the black market. 

The wine industry has been watching the development from a distance, and since Canada legalised the drug in October 2018 it’s been more and more difficult to not have an opinion about it. Large investors are currently pushing up the stock prices of cannabis companies. Enterprises such as Canntrust, Tilray, Cannabix Technologies and Aurora Cannabis are seen as the next big thing by investors that feel that they missed the boat on Apple, Google and Amazon.

The investment case is that these early marihuana businesses will profit greatly once the drug becomes legal on the federal level in the US. Marihuana exports to the US might well become a multi-million dollar business over night. But are we not overestimating the profitably of the cannabis business?

Should wineries invest in cannabis companies?

Constellation Brand’s multi-billion dollar investment in Canadian cannabis company Canopy Growth appears to be paying off, at least in the short term. The value of its shares in the company were already worth an extra $1.3 billion by October 2018. But is the value growth sustainable?

Some voices argue that the wine business has overestimated the profitability of the marihuana trade. Unlike wine, the cannabis user can support they habit with a few grams per week, and the cannabis prices are expected to decline as more companies are getting licensed to produce. Investors seem to compare cannabis-stocks today with the internet sector prior to the dot-com bubble. But isn’t there a vast difference in scalability between these sectors?

Technology companies have a scalability far greater than growing or distributing a physical product, such as cannabis. Indeed if there is any high profitability in cannabis, it’s difficult to see that it would be on the production side. We have yet not seen any cannabis brands on the market achieving any significant price premium, why is this one might ask. It’s evident that cannabis seems to be more comparable to the bulk wine business than branded packaged wine.

Another reason to worry about cannabis profitability is the production price. Experts with insight into cannabis growing writes that fine quality marihuana is not much more complicated to grow than tomatoes. This is a major difference when comparing the drug to wine. One of the key factors that fine wine commands a significant price premium to entry level wine is that it’s complicated and expensive to make.

So what is the most likely scenario regarding the future profitability of cannabis? As it looks in 2019 it seems as the cannabis prices will decease even more, leaving a small magin left for producers and distributors. In Canada they are in fact already seeing a situation of oversupply further putting pressure on prices. No doubt there will be money to be made in cannabis products, but it's hard to understand the current hype when analysing the profitability of the trade.

For those interested in the synergies between the Wine & Cannabis Industries the trade fare Wine & Weed is due on the 8th of August 2019 in Santa Rosa, California.

An article by CRUZ LILJEGREN, the founder of Premium Wine Broker (PWB) –a virtual négociant and bulk wine “talent scout”. As an independent wine broker, PWB filters out the most sellable wines available in bulk on the global market. He holds a B.A. in Hospitality Science and a MSc in wine business from the Burgundy School of Business, Dijon. In 2016, he became the first member of The American Association of Wine Economists (AAWE) under the age of 30.