February 25, 2020

Is Cannabis the Reason Behind Drop in Beer Sales?

Midas Letter
Midas Letter
Is Cannabis the Reason Behind Drop in Beer Sales?

StoneCastle Investment Management President & Portfolio Manager Bruce Campbell joined Midas Letter to discuss the decrease in Canadian beer sales and questions whether cannabis is the root cause. StoneCastle and Mr. Campbell actively manage the STONECASTLE CANNABIS GROWTH FUND which invests primarily in equity securities which derive a meaningful portion of their revenue from the cannabis or related industries. The Portfolio Manager extrapolates that the potential size of the Canadian cannabis market will hit range of $10 billion to $11 billion as more stores and locations open across the country. Watch the entire interview to hear Mr. Campbells opinion on more cannabis market related subjects such as the HMMJ and HMUS ETFs merger and BC Budtenders unionizing.


James West: Bruce Campbell joins me now from Stonecastle Investment Management for the Stonecastle Investment Management Cannabis Week and Corona Week update. Speaking of Corona, Canadian beer sales down 3 percent in 2019 being blamed on cannabis. What’s the story there?

Bruce Campbell: Well, I guess this is the largest drop in seven years for beer sales down down, and it’s being blamed on cannabis. And you know, the interesting thing is that we don’t really have cannabis beverages out yet, so they’re just saying that, you know, people consumed less beer because they’re using cannabis in different forms. Everyone still continues to think that, you know, beverages are going to be this huge segment.

You know, I don’t necessarily know if they will. Right off the bat, I mean, you basically look at the data in the US, and they’re still a pretty small little fraction of what’s going on. But it’ll be interesting to see, when they actually do roll out the beverages, if it has another impact. If 2020 sales are down again, then yeah, I guess you can see why, you know, some of the beverage companies have got into the cannabis space – you know, obviously with Constellation, right?

James West: Sure. You mentioned that Canadian sales data from December was showing an 8 percent month-over-month growth at 146 billion annualized at 1.8 billion. That’s not a bad number. That’s almost as much as the State of Colorado.

Bruce Campbell: Yeah, I mean, what we’re seeing is a continual ramp-up. So if you look at that 146 million and annualize it, it’s a 50 percent growth rate over the previous 12-month period. So you know, when we’re approaching that, you know, kind of $2 billion sales mark, if you look at Colorado where, you know, they have about 6 million people, give or take, there, and their sales were about the same as our monthly – sorry, they’re about the same as our monthly annualized number.

James West: Right.

Bruce Campbell: So if you take a look at that and sort of extrapolate, oh, that makes the Canadian market sort of in that $10 billion to $11 billion range, which is what originally everyone said it would be. Obviously, we need to grow into that, right, where we need to get the stores, the locations, and get people who are in the black market coming over, and obviously having new people who have never experienced cannabis, or who haven’t experienced it for a while, get those crossed over, as well.

There’s sort of 750 retail locations right now, and when you think about that, again, if you just look at Ontario, there’s over 2,000 locations to buy beer and wine and alcohol compared to 750 locations across the entire country. So you can see where the retail has to really expand before we can see probably a pickup in sales.

James West: Sure. And is there any reason to be optimistic about the increase in retail distribution points in Ontario, for example?

Bruce Campbell:   Well, you know, they continue to say that they’re going to roll it out, and I think they were talking about 20 per month is what they wanted. I just recently was talking to a retailer this week, and they said that there was a sort of last-minute change that they, you know, they had their own theories on why this might have happened, but I guess the latest was that it wasn’t going to just be, you know, a straight lottery like as far as like who got in first would get access to these licenses. But they were actually going to look at who was prepared and who was ready.

So it kind of takes away anyone who doesn’t have capital and hasn’t built a free-standing location out of the competition to start these new locations. But that being said, there are lots of, you know, sort of well-capitalized groups, between the LPs and some of the public companies that are on the retail side, so I don’t think there’s going to be a problem; it’s just going to be a function of, like, whether or not they can get them ramped up in that time frame, that 20 per month.

But certainly that would help, if we saw that through, you know, kind of the rest of 2020 and then into 2021.

James West: Mm-hmm. Okay. Another news item that caught my interest this week that I’m sure you’ll have some comment on was the merger of the HMMJ and the HMUS ETFs merging into the US ETF. Does that sort of give us a indication that that’s where the, that’s where the money is? Is it going into the US more so than Canada?

Bruce Campbell: Yeah, I mean, it just depends on how you look at it. I looked at it a little differently. You know, we saw the Evolve ETFs announce that they were shutting down, and I think this is kind of the next evolution in that. And what it really is showing me is that that money flow from kind of the retail investor has really disappeared out of the market, and we can tell that by the stock prices that, you know, these things just continue to drip down and go lower. You know, maybe they’ve bottomed out here, but they’re not certainly having any big moves upwards.

And you know, I think that’s just a function of lack of investor interest. If you look at those two ETFs that they’re merging, I think one has around 3 million in assets and the other has a little bit less than 20, so, you know, from Horizon’s perspective, they’re trying to make it efficient and obviously take advantage of the economies of scale by putting them together to reduce some of their costs and still manage the same assets. And then hopefully grow it down the road.

Obviously, the US is where the opportunity is, so what they said is, we’re going to get rid of the junior LPs and just have the US LPs, or the MSOs, and that would be the product that they run going forward. And these will, you know, ebb and flow, obviously, with dollar amounts. It’s probably not unlike what you would have saw if you had a – there wasn’t a lot, but if you had a technology ETF back in, you know, sort of the 1999-2000-2001 era.

James West: Right. Bruce, the BC Budtenders gave notice that they want to unionize. That was an interesting headline!

Bruce Campbell: Yeah, I was a little surprised that it’s happened this quickly. You know, in an industry that’s, you know, not really that old, surprising to see that they’re already looking for the benefits of being in a union. You know, if you look at other industries – you know, something as an example like WestJet – it took them probably close to 15 years before they actually got unionized, and now, you know, in an industry that’s a couple of years old, the budtenders are already in the process of unionizing.

But I guess that probably also has a large part to do with, you know, the fact that it’s in BC. You didn’t see the Ontario budtenders announcing that; I mean, maybe it grows there, or moves to there, but you know, it’s kind of more along the lines of, you know, sort of the socialist feel that we have over here in BC.

James West: Yeah, right. Interesting! So do you think that the unionization movement will spread to other sectors of the marijuana sector?

Bruce Campbell: Certainly it’s potential, right? I mean, once they get their foot in the door, you know that’s what the unions always will push for, right? At this point in time, you know, I think the wages have been probably pretty good in the sector. That being said, you know, we’ve seen a number of layoffs in the last probably 60 days here, so you know, I think there’ll probably be a bit of a tightening in the amount of compensation that’s handed out. And so that would certainly be a ripe time for, you know, unions to move ahead with their unionization.

James West: It strikes me as a little bit disingenuous to try to organize a union at a time when the entire industry is suffering financially. I mean, there’s just no way that unionizing does not add a huge cost to the labour bill of these companies, and it might actually only serve to accelerate the demise of a lot of these companies, don’t you think?

Bruce Campbell: It certainly could, yeah, for sure. I mean, as you say, the expenses are going to rise if they are successful in unionizing, but I suspect that the people who are, you know, sitting in that position where they want to unionize haven’t really given that thought that hey, maybe we should be happy that we’re in this growing industry and we should let it breathe before we try to stomp on it.

James West: Yeah, right. So do you think that that would, I mean, and then my point being that on the other hand, if they accelerate the demise of the weaker LPs out there, they’re going to accelerate the profitability of the larger LPs who survive, arguably.

Bruce Campbell: Yeah. Probably what it does is, you know, if you look at it from a retail perspective, which is where the budtenders are, it’s going to put pressure on anyone who’s a smaller operator who’s trying to manage, you know, maybe just one or two stores. So you could see an acceleration, sort of the bigger conglomerates, where they have 30 or 35 stores now, that, you know, they probably can pick off, you know, smaller stores that aren’t as profitable because of the unionization and, you know, bring those in. Obviously economies of scales and synergies, and make that actually profitable for them to operate versus, you know, the guy who’s just got one or two locations.

James West: Right. Right. So then, going back to Colorado here relative to Canada for a moment: I didn’t notice that that was a topic later on in this conversation, but the, you extrapolate, so Colorado put sales at 1.7 billion. If you extrapolate that to Canada, you come up with a figure of 11 billion; is that based on a per capita usage?

Bruce Campbell: Yeah, that’s correct. That’s just taking the population and extrapolating it out. And that’s, you know, if you go back to when Canada was first legalizing and, you know, all of the analysts were trying to figure out what’s the size of the market and what should we put as a multiple on this market, you know, a lot of people used that, where basically Canada’s, you know, 6.5, 7 times bigger than Colorado; that was one. So they extrapolated out the sales per capita there to what the sales per capita would be in Canada.

And so, you know, most of the research reports that came out initially on the size of the Canadian market put it somewhere in that sort of $9 billion to $10 billion, sort of $8 billion to $10 billion mark, based on how much rec and medical you put into those formulas is what they felt was going to be at, you know, at full maturity. And if you look at Colorado, it’s obviously been through all the growing pains that, you know, Canada is dealing with now. They have a full retail distribution network, they’ve got, you know, supply that’s been oversupplied and now has come back in line, and you know, that sort of shows you that, based on that population number, we should be somewhere in that kind of $10 billion to $11 billion range, is what I’m saying.

James West: Bruce, well, that’s a great update for the week, and I thank you for your participation. We’ll come back to you next week.

Bruce Campbell: Yeah, thanks a lot. Have a good weekend.

James West: You, too.


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