Retail Decides to Experiment With Cannabis

(Bloomberg Opinion) -- If there is one deal that symbolized the most recent chapter of the “green rush” into marijuana investing, it was Constellation Brands Inc.’s $3.8 billion bet last year on Canopy Growth Corp.

The move, through which the company behind Corona beer and Robert Mondavi wines upped its stake in the Canadian cannabis grower to 38 percent, sent two clear signals to investors. First, that the big consumer-goods stalwarts were beginning to see the nascent legal marijuana market as a plausible avenue for growth (and a potential threat to their existing businesses). And second, that perhaps an emerging class of cannabis startups — Aurora Cannabis Inc., Tilray Inc., Hexo Corp., Cronos Group Inc. to name a few — were more than just a sideshow or passing trend. (These ideas got further validation when Marlboro maker Altria Group Inc. decided in December to take a minority stake in Cronos.)

Retail Decides to Experiment With Cannabis

Now comes the next chapter of the mainstreaming of cannabis: Drugstore giant Walgreens Boots Alliance Inc. said last week it is to carry certain creams and sprays containing CBD — a compound found in cannabis that doesn’t create a high and is thought to have some health benefits — in some 1,500 locations. This is just one of several such experiments to watch. CVS Health Inc. said last month it would sell CBD beauty and personal care products in 800 of its stores. Outside the wellness and health sector, shoe chain DSW has agreed to carry CBD foot creams and other similar items in 96 of its U.S. stores. Luxury players Neiman Marcus and Barneys New York are also dabbling in the category.

As the traditional world of retail embraces the legal cannabis industry, and potentially demonstrates the consumer appeal of these products, investors can gain confidence that, assuming regulatory hurdles are removed, this Wild West of a sector may settle down into a profitable new niche with staying power.

Retail Decides to Experiment With Cannabis

I’m particularly interested in an announcement that more than 100 CBD stores are coming to malls owned by Simon Property Group Inc., thanks to a partnership the mall operator struck with Green Growth Brands Inc. It represents a key test of whether there’s enough demand for national chains of specialty stores dedicated to this product.

If these efforts in the legacy retail world get traction, I suspect it will pump the price of cannabis stocks even higher, and it may send different types of consumer companies — perhaps makers of personal care items such as Procter & Gamble Co. — on an acquisition or investment spree. It would show that the production capabilities these companies are building have real opportunity to be used for consumer goods that are embraced for perceived wellness attributes.

Retail Decides to Experiment With Cannabis

But watch carefully for the reverse dynamic, too. If retailers try carrying CBD merchandise and then quietly wind down their offerings or decline to advertise or emphasize them, that would be a blow to this emerging sector.

Some of the thesis for enthusiasm around the cannabis industry is that it presents revenue opportunity far beyond courting potheads. If the retailers find interest in these products is fleeting and that there aren’t a lot of repeat buyers, that should raise concerns that CBD beauty and personal care items are a fad. Given that the category has seen boomlets for everything from snail slime to crystal face rollers, this should be considered a legitimate possibility.

A bust in this phase of CBD adoption could make it more likely that established companies that have been on the sidelines so far, like packaged-food behemoths Coca-Cola Co. and Mondelez International Inc., will stay there. Why pour money into making a CBD-infused beverage if it seems destined to be a short-lived novelty?

Getting legacy retailers’ imprimatur and distribution is a big step for the vanguard of legal pot. It’s up to them now not to squander the opportunity.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Sarah Halzack is a Bloomberg Opinion columnist covering the consumer and retail industries. She was previously a national retail reporter for the Washington Post.

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