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Coca Cola (NYSE: KO) could be interested in the development of CBD-infused drinks, the non-psychoactive ingredient of marijuana that treats pain but does not improve users. Beverage manufacturer is in talks with a Canadian marijuana grower Aurora Cannabis (NASDAQOTH: ACBFF) to develop the drink, according to Bloomberg.
Aurora shares surged after the news, but Coca-Cola shares have barely budged. This is because the development of a new unique drink (even a cannabis infusion) would probably not move the needle for Coca-Cola, even though it could dramatically increase the income of people. ; Aurora.
Marijuana leaves in a grapefruit drink. Source of the image: Getty Images.
In a statement to Bloomberg, Coca-Cola spokesman Kent Landers said the cannabis market "is evolving rapidly" but that "no decision" has been made on the new products. Aurora stated that she occasionally participated in "exploratory discussions" with other companies, but that she had not yet established a partnership on beverages.
As a result, it appears that many titles on Coca-Cola selling marijuana-infused drinks are premature and misleading. Let's take a look at why Coca-Cola and other companies would consider selling cannabis-based products, and why investors should not be too excited about these developments at the moment.
Pivoting slow-growing markets
Coca-Cola's biggest long-term problem is the drop in soda consumption rates around the world. Last year, Digestion of drinks indicated that soda consumption in the United States had fallen to its lowest level in more than three decades.
The same pattern can be observed in many countries where health conscious consumers avoid soft drinks and other sugary drinks. This decline has been exacerbated by the introduction of soda taxes in a growing number of US and overseas cities.
Coca-Cola's main strategy has been to diversify its beverage portfolio with bottled water, teas, juices, energy drinks and other beverages. That's why he bought a big stake in the energy drink maker Monster Drink, accepted to acquire The coffee chain U.K. Costa Coffee and would have looked into the purchase of GlaxoSmithKlinethe malted milk brand, Horlicks. Coca-Cola has also introduced new low-sugar, sugar-free versions of its flagship sodas.
It would appear that a CBD-infused drink would complement these efforts and offset the decreasing sales of Coca-Cola soda. However, it is unclear to what extent these drinks could be legal even after removal of the psychoactive ingredient from marijuana.
Marijuana use for recreational purposes has only been fully legalized in three countries – Canada, Georgia and Uruguay – as well as nine US states and Washington, DC. The laws of other markets are more obscure and it is not legal at the federal level in the United States. It is therefore difficult to know how all laws will apply to CBD-infused drinks. Until now, CBD-infused drinks were sold by smaller companies, such as Sprig and Dirty Lemon, rather than by major beverage manufacturers.
CBD drink with dirty lemon. Source of image: Dirty Lemon.
Coca-Cola is not alone …
Coca-Cola's interest in marijuana may seem surprising, but many other aging core consumer companies facing slowing sales are looking in the same direction.
Molson Coors Brewing (NYSE: TAP) recently agreed to form a joint venture with the Canadian cannabis company Hydropothecary Corp. to produce cannabis beverages in Canada. Diageo (NYSE: WD) would also be in talks with at least three Canadian cannabis companies to produce marijuana products. Both alcohol companies are facing slower sales of their traditional beer brands.
Altria (NYSE: MO), the largest tobacco manufacturer in America, has also recently said that it is "exploring options" and "evaluating market opportunities" for cannabis. This comment has sparked wild speculation Altria could mass-produce marijuana cigarettes to offset the slowdown in traditional cigarette sales.
Meanwhile, a recent study by Yahoo News and Marist College showed that 22% of Americans are "current" marijuana users, defined as marijuana smokers at least once or twice a year. 16%.
But watch out for the reaction
The cannabis market seems to be an interesting opportunity for Coca-Cola and other companies, but it could also be a minefield of public relations and regulation. First, the family-friendly image of Coca-Cola could be tarnished by headlines claiming it sells marijuana sodas.
Meanwhile, the Trump administration is taking a stronger stance on the legalization of marijuana in Canada. A senior border official in Trump recently said that Canadians working or investing in the marijuana industry across the country could face travel bans in the United States. Many Canadian companies are also directly targeted by Trump administration rates – and these rates could extend to cannabis companies and their US partners.
This is why many companies are only making small steps in the market. And small steps never move large companies like Coca-Cola, so investors need to focus on more significant developments (such as Costa's takeover).
Leo Sun owns shares in GlaxoSmithKline. The Motley Fool owns shares and recommends Monster Beverage. Motley Fool owns shares in Molson Coors Brewing. The Motley Fool recommends Diageo. Motley Fool has a disclosure policy.
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