Is Coca-Cola's Cannabis Venture a Solution to Its Problems?

Coca-Cola Company KO, popularly known as Coke, is surely on the go with its search for alternatives to combat troubles related to the fading popularity of its sugary carbonated drinks. After a recent $5.1-billion deal to acquire Costa coffee, the company has now shown interest in fast-growing marijuana market as it looks for a partner to produce cannabis-infused health drinks. This beverage giant mainly focuses on growth of functional wellness beverages, infused with the non-psychoactive component of the Cannabis plant — cannabidiol (“CBD”), which has anti-inflammatory and pain-relieving properties.

The Atlanta-based soft-drink maker has approached Canada’s Aurora Cannabis Inc. for its marijuana-related strategy. However, both Aurora and Coke did not confirm any agreement, regarding the matter. Aurora is the third-largest pot company in Canada, with a market cap of C$8.7 billion.

Shares of Aurora have jumped nearly 17% on the Toronto Stock Exchange, following the news about Coke’s interest in marijuana drinks. Meanwhile, shares of Coke did not react much.

Overall, shares of Coca-Cola have witnessed momentous growth in the last three months. This Zacks Rank #3 (Hold) company has risen 6.3%, outperforming the industry’s growth of 3.5%.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

CBD is a chemical in the pot, mainly used for medicinal purposes around the world to relieve inflammation, pain and cramps. This component of the marijuana plant does not give users the high, unlike THC or tetrahydrocannabinol, which is marijuana’s main psychoactive ingredient.

Notably, marijuana remains illegal at the federal level in the United States, with the exception of a few states, where it is legal. However, there is an increasing awareness about the use of CBD to treat chronic pain to anxiety and epilepsy in children. Backed by its benefits, the first-ever marijuana-based treatment is likely to be launched in the United States soon, as epilepsy treatment by GW Pharmaceuticals Plc has been approved by regulators in June.

Coke’s interest in the marijuana market comes at a time when the beverage industry, on the whole, is grappling with a slowdown in business due to consumers’ shift to healthier options. Notably, the alcohol segment is suffering due to lesser demand for beer, which is being compensated by wine and others. On the other hand, sugary sodas have been witnessing declines as consumers prefer non-carbonated and health drinks.

Additionally, Coke is on the verge to gain from opportunities, arising from the recent legalization of recreational marijuana in Canada on Oct 17. The company joins an increasing number of beverage counterparts, mostly from the alcohol space, which have ventured into the marijuana market lately.

Some notable names that recently gathered stakes or entered partnerships in the cannabis market include the Corona beer marker Constellation Brands STZ, Molson Coors TAP and Heineken HEINY. Of these, Constellation Brands seems to have a bigger game plan, having invested $4 billion in Canopy Growth Corp. CGC, increasing stakes to 38% from 9.9%. Similarly, we have Molson Coors’ joint venture with Hydropothecary Corp. to take advantage of the industry’s growth. Additionally, Heineken has launched Hi-Fi Hops, a cannabis-infused sparkling water, in California (where recreational marijuana is legal).

This makes it clear that the acceptance of cannabis is catching up among consumers. Consequently, major players in the U.S. beverage industry and some tobacco stocks are well-placed to make the most of the legalization of marijuana in Canada.

Clearly, this might be a big opportunity for Coca-Cola, which, like other soda makers, has been grappling with the increasing aversion of consumers for sodas. For a while, Coca-Cola has been looking to diversify its product portfolio by shifting to ready-to-drink coffee, bottled water and functional beverages. That said, let’s wait and see if the company comes up with a definitive deal to produce cannabis-infused beverages any time soon.

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Molson Coors Brewing Company (TAP) : Free Stock Analysis Report
 
Heineken NV (HEINY) : Free Stock Analysis Report
 
Constellation Brands Inc (STZ) : Free Stock Analysis Report
 
Coca-Cola Company (The) (KO) : Free Stock Analysis Report
 
Canopy Growth Corporation (CGC) : Free Stock Analysis Report
 
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