Why Hexo (HEXO) and Molson (TAP) may disappoint with their cannabis beverages

: hexo | HEXO Corp. Common Shares News, Ratings, and Charts

hexo – Limited experience for users and poor taste could hinder Hexo and Molson Coors joint venture.

Molson Coors (NYSE:TAP) is ready to tap into Canada’s new cannabis-infused beverage market using its joint venture, Canadian marijuana grower HEXO(NYSEMKT:HEXO) to produce nonalcoholic beverages for the market as soon as it is legal to do so.

While it says it’s ready to hit the ground running, the beverage maker might still stumble as it runs into a Canadian regulatory roadblock that causes cannabis drinks to be a really bad trip.

Ready to hydrate the market

Molson and HEXO Corp. (HEXO - Get Rating) created the Truss joint venture last year, setting it up as a stand-alone company with its own board of directors and independent management team. Molson owns a controlling 57.5% interest in the JV, with HEXO Corp. (HEXO - Get Rating) owning the remaining 42.5%. Its CEO is former Molson executive Brett Vye, who reports to a five-member board of directors. Molson appointed three members to the board, HEXO Corp. (HEXO - Get Rating) two.

Truss executives recently told Bloomberg they were prepping for the December 16 legalization date for beverages. HEXO Corp. (HEXO - Get Rating) vice president of strategic development Jay McMillan said, “We’ll have a very large supply so we’ll be in a good position to be able to meet the demand of the marketplace and at the same time also ensure that we’re meeting the variety that the marketplace wants.”

Among the drinks being considered are cannabis-infused water, hot beverages, and a “beer-like product.” Canadian regulations prohibit using terms like “beer” and “wine” when marketing the alcoholic beverages, so Truss and other brewers and vintners intending to capitalize on the opportunity will have to be creative with the beverage names.

Sales slacking off

Although the U.S. already has cannabidiol-infused beers and beverages on the market following the marijuana compound’s legalization last year, McMillan derided them as tasting like “bong water.”

So being early to market and getting the taste right is important because of the potential opportunity pot drinks represent. Molson president and CEO Mark Hunter told analysts last year that although it’s difficult to provide a number because cannabis beverages were illegal at the time, he believed the total cannabis market in Canada to be about $7 billion to $10 billion in size, with beverages accounting for anywhere from 20% to 30% of the total, or as much as $3 billion. Even on the low end that’s a $1.5 billion opportunity.

But analysts might have gotten ahead of themselves in their euphoria over marijuana’s legalization and the potential for marrying weed with alcohol. Although Canadians spent some $41 million on legal weed just one month after the country legalized it, year-to-date sales haven’t really held up, coming in much less robust than initially anticipated and getting off to a much slower start than many thought they would.

A weak brew

The beverage industry might also be in for a surprise now that the government has limited the amount of tetrahydrocannabinol (THC), the principal psychoactive component of marijuana, that is allowed to be present in a drink.

According to the just-released regulations, THC cannot exceed 10 milligrams in a package, meaning an entire six-pack of cannabis-infused “beer” can contain only 10 milligrams, dramatically limiting the experience drinkers can expect.

Even in the U.S., where cannabis is not legal on a federal level, states allow individual servings to contain 10 milligrams of THC, and California recently clarified its rules to say THC could not exceed 100 milligrams across the whole package.

It’s possible Canada could revisit its regulations to refine them, but given where they stand now, when Molson Coors and HEXO Corp. (HEXO - Get Rating) stock Canadian store shelves with their new cannabis beverages in December, they just might turn out to be a real buzzkill.

HEXO shares fell $0.03 (-0.55%) in after-hours trading Thursday. Year-to-date, HEXO Corp. (HEXO - Get Rating) has gained 58.02%, versus a 17.72% rise in the benchmark S&P 500 index during the same period.

This article is brought to you courtesy of The Motley Fool.

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