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Pot Companies Can Learn Lessons From Energy Drinks, BofA Says

Pot Companies Can Learn Lessons From Energy Drinks, BofA Says

(Bloomberg) -- Pot and energy drinks may sound like an odd mix, but cannabis investors would do well to remember the lessons taught by Red Bull and Monster Beverage Corp., according to analysts at Bank of America Merrill Lynch.

The two dominant energy-drink brands demonstrate that “distribution -- early and at scale -- is perhaps the most important driver of long-term value for competitive consumer categories at early stages of development,” Christopher Carey wrote in a note published Wednesday.

Between them, Red Bull and Monster held 87% of the U.S. market in 2018 after fending off significant competition in the early days. Red Bull had the advantage of being first in 1997, while Monster didn’t enter the category until 2002, according to Carey. However, it leveraged distribution partnerships with 7-Up and RC Cola, Anheuser-Busch InBev and Coca-Cola to establish a strong brand presence.

Canopy Growth Corp. and Cronos Group Inc. are best positioned to do the same as they expand into the U.S., Carey said. This is because of Canopy’s partnership with Constellation Brands, which holds a 37% stake of the pot producer, as well as its relationship with Alimentation Couche-Tard, which owns 7,800 U.S. convenience stores. Cronos, meanwhile, can leverage its investment from Altria Group and its 230,000 U.S. distribution points.

This will be particularly useful for hemp-derived CBD products, which were legalized in December and can now be sold in a variety of stores nationally.

Strong distribution creates “a defensible competitive moat which has been difficult for other players to penetrate,” Carey said.

To contact the reporter on this story: Kristine Owram in Toronto at kowram@bloomberg.net

To contact the editors responsible for this story: Brad Olesen at bolesen3@bloomberg.net, Will Daley

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