Gerry’s Insights: Don’t Rush The Bubble

It’s boom times for predicting boom times in cannabis and hemp. Stocks of many pure plays are on a tear, and financial transactions are occurring at outlandish multiples that put even Dr Pepper Snapple’s acquisition of Bai to shame. Beverage companies right now can get a lift simply by declaring their intention to enter the segment.

To me it’s got “bubble” written all over it, though that’s not to say we’re not at the incipient stages of what may prove to be a major new industry. And I know from bubbles better than most: even before the dotcom boom-and-bust, I’d experienced a similar frothiness. While covering manufacturing back in the 1980s, when General Motors was infatuated with the potential of industrial robots, projections were running wild about their growth, and failing makers of, say, welding equipment could prompt a surge in their share prices just by changing their corporate names to include the phrases “robotics” or “machine vision.” The robotics newsletter where I worked would print some projection that we’d allow was pretty blue-sky and we’d hear those same somewhat arbitrary projections being used as justification for major capacity expansions. Industrial robots proved not to be a panacea, GM cut back its purchases and before long many of the high-fliers – along with my newsletter – were kaput. Since subsequent bubbles in dotcoms, real estate and bitcoin carried an all-too-familiar ring, I’m not quite ready to toke up in celebration of a world-changing cannaboom.

Most people in the beverage business must at least suspect this, but it can be easy for their judgment to be clouded by their own business dilemmas. For beer wholesalers who’ve seen a flattening in beer trends – there may still be robust growth in beer sold through local brewers’ taprooms, but that completely bypasses them – it’s unsurprising to put outsize hopes in cannabis as a new leg to their businesses, even though we’re a lot of miles away from defining who will be delegated by regulators to handle distribution and how. (Of course, one solution might be for them to finally make a wholehearted effort to play in non-alcoholic beverages, but that’s more of a slog than entering an explosive sector like cannabis where a bottle of THC currently goes for $10 or more.) Ditto for beverage players in cluttered categories – even newer ones like kombucha and cold-brewed coffee – who’re looking for a differentiator, or those who’re publicly traded and wouldn’t mind enjoying a bounce in the stock price.

For a sense of the many challenges and imponderables confronting the cannabiz, you only need to read the risk sections of corporate players’ prospectuses. Despite passage of the Farm Bill, the regulatory situation remains highly unsettled. (Who is named permanent successor to departing FDA commissioner Scott Gottlieb will somewhat clarify things.) In part because the government made it so difficult in the past, there is a dearth of U.S. research on cannabis and its myriad components to guide policymaking. Amid the glut of players of all sizes and at all tiers of the business, it is very difficult to pick winners and losers with any degree of faith at this point.

In trying to get my hands around this segment – and I certainly won’t claim any real expertise at this point – I have encountered a few assumptions among entrepreneurs entering from the beverage space that I have reason to question. I’m going mainly on hunches, as it’s hard to develop great conviction in such fluid circumstances, but for what it’s worth, here are a few:

If you don’t rush in now, the big guys will blow you out of the market. We don’t know yet what regulatory barriers might end up favoring the big established players and impeding small independent players, in an era in which the government has shown scant interest in reining in market dominance. That issue aside, the major beer, beverage and packaged food players haven’t exactly covered themselves in glory with their ability to grow through internal innovation. Is there some special reason why this segment will prove to be different? Certainly, the management teams behind the bigger cannabis players like Canopy, Aurora and Tilray with whom they’re aligning have proved themselves to be agile, creative businesspeople. But relying on CPG giants who haven’t been able to innovate effectively in their core businesses doesn’t seem like a slamdunk in the nascent beverage and edibles spaces. Maybe the new brands these alliances create will prove to be similar clunkers.

The amateurishly branded incumbents in dispensaries will be road kill in the cannabis wars. Sure, a lot of the brands to be found in dispensaries lack sophistication, or any sign of a coherently thought-out strategy. But is that homespun, amateurish branding really so far off the mark? Hasn’t that been precisely the gibe directed over the years at innovative beverage brands like Snapple, AriZona, Vitaminwater, Red Bull and Bai that went on to steadily refine their propositions and end up as solid brands with dedicated consumer followings? (Disclosure: I was among those who questioned Vitaminwater. Seriously, who would ever want to drink their vitamins?) The “professional” branding and marketing types who believe those pioneers will be easy prey may be too quick to dismiss the equity that comes of having been an early, authentic player in a risky sector. Many of these brands could end up evolving to less assailable positions.

Don’t assume your trade partners will all be wowed when you throw your hat in the ring. Among established brands – meaning those that have been around a few years, and built some degree of business around non-cannabis beverages, even if their toplines are still modest – it can feel like a heady gesture to announce that you’re entering or about to enter the space. It puts you in an exciting new category where the sky seems to be the limit, one with seeming relevance and appeal across demographics, from millennials to baby boomers. But the downside is that some of your trade partners may wonder whether the move signals that you’re losing faith in the ability of your core brands to meet growth expectations. And if you’re losing faith, maybe they should temper their faith, too. If that vibe I’m picking up is accurate – and keep in mind that many of the first entrants have been beverage companies who’ve struggled to grow their toplines – then it may be wise to hold off on the pre-announcements and keep your cards closer to the vest. Your risk/reward ratio may be quite different than theirs.

Longtime beverage-watcher Gerry Khermouchis executive editor of Beverage Business Insights, a twice-weekly e-newsletter covering the nonalcoholic beverage sector.