Cannabis beverages could soon become a lot more mainstream, at least in Canada, where the products are now legal. As of Oct. 17, edible and ingestible cannabis products are legal — in some retail shops, they hit store shelves by December. Big beverage companies like Constellation Brands and Molson Coors have gotten involved in producing cannabis-infused beverages, with the former teaming up with Canopy Growth while HEXO has a joint venture with the Canadian arm of the latter.
Another big name that’s also been rumored to be interested in cannabis: Coca-Cola (NYSE:KO).
YouTube video sparks rumors about company’s interest
A recent and since-deleted YouTube video showed a Coca-Cola can with a childproof lid on it. In the video, the author claimed that his father works in bottling and that Coca-Cola was interested in developing drinks that contain cannabidiol (CBD). Edible products, including beverages, can be harmful to children and having a childproof lid is one way that a company could help prevent accidental consumption by minors.
It may sound convincing, but the company has denied any interest in CBD. There are also a couple of important reasons why it doesn’t make a lot of sense for the company and why investors shouldn’t read too much into these claims.
Image source: Getty Images.
The opportunity just isn’t there
Coca-Cola was previously linked to the cannabis industry when in 2018 it was rumored to be looking at partnering with marijuana giant Aurora Cannabis (NYSE:ACB). Nothing came of that and it was never clear how close the two companies were to a deal, or if the soft drink giant was just kicking tires on the possibility.
Aurora hasn’t partnered with a beverage company and, at this point, it’s unlikely that will change, with the company previously stating that it didn’t believe the market for cannabis beverages was large enough.
Fortune Business Insights estimates that by 2026 the global market for beverages will be just over $2 billion. While that’s a significant increase from the $174 million the research company estimated the segment of the industry to be worth in 2018, it’s still about the size of a rounding error for Coca-Cola, a company that in the past 12 months generated $33.6 billion in revenue.
Impact on branding could be significant
There’s just not enough of a market for cannabis beverages at this point for it to make any sense for Coca-Cola to get involved and potentially upset its loyal customer base. That’s one of the reasons one of the company’s key investors, Warren Buffett, also doesn’t believe that it would be a wise move for the company: it could damage the brand.
It’s something that executives are also very cognizant of. In 2018, when asked about getting into cannabis, Starbucks CEO Kevin Johnson stated, “That’s not anything we’re considering or pursuing – I just don’t feel it’s accretive to our brand and kind of what our brand stands for.”
Branding is an important consideration that companies are not taking lightly, and that’s a key reason why companies like Coca-Cola and Starbucks aren’t going to go into a controversial industry for not a whole lot of sales potential.
Key takeaways for investors
Coca-Cola probably isn’t going to get into cannabis, and its business will continue to be just fine. While it would be earth-shattering news for a company like Aurora if it were able to land a big partner like that, the company has made it clear that a deal involving beverages is not in its cross-hairs. However, with billionaire investor Nelson Peltz still out there looking for other deals for the company, it’s possible that there is a partnership for Aurora, just not in beverages.
As the cannabis industry continues to evolve and legalization progresses, there will be more companies that take an interest in marijuana. However, until it is legal at the federal level in the U.S., investors shouldn’t expect to see any large national brands getting involved. One of the biggest deterrents it that it’s not possible to move marijuana across state lines, even if the states have legalized pot. Getting into cannabis at this point would not be efficient and with the possibility that it hurts a brand’s image, there are far more risks than there are potential rewards, especially for large organizations.
Investors shouldn’t read anything into these latest rumors and remember that making an investment decision based on uncorroborated information can be very risky.
David Jagielski has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Starbucks. The Motley Fool recommends Constellation Brands and HEXO. The Motley Fool has a disclosure policy.”>