Tilray Brands Inc.’s big bet on legal cannabis is proving so overoptimistic it is now relying on the alcohol market it once aimed to disrupt.
A long-awaited easing in US cannabis laws, known as rescheduling, is still at least months away, leaving in place suffocating restrictions on sales due to marijuana’s classification alongside drugs including LSD and heroin. That’s led cannabis companies to find other businesses, including alcohol and hemp, undercutting boasts like Tilray’s in its debut 2019 filing that it would capture spending from brewers, distillers and wineries.
“Cannabis operators in the US are doing everything they can to generate cash flow and bridge until we get rescheduling,” said Scott Fortune, a Roth MKM managing director. “If we don’t get rescheduling, we’ll see further elimination, consolidation of many retailers, brands and operators within the industry.”
To avoid that fate, firms like Tilray have sought more legitimate businesses like the sale of booze and hemp to stay alive. In the fiscal quarter that ended in May, the company more than doubled alcohol sales from a year earlier to $76.7 million, the most of any product line and about $5 million more than it brought in from selling cannabis. That marked the first quarter in which Tilray generated more revenue from booze than weed.
Optimism that the US will change its stance on marijuana increased this year when the Drug Enforcement Administration said it was reviewing the drug’s status. President Joe Biden came out in favor of the change in May.
Cannabis stocks rose Monday after former President Donald J. Trump said he supports changing the drug’s classification from a schedule I substance to schedule III. The DEA will hear expert opinions on the proposed classification in December.
“I am as close to 100% confident that we will get a positive decision as I could reasonably be,” Darren Weiss, president at Verano Holdings Corp., said in an interview.
For businesses, the change would mean the end of burdensome taxes levied for dealing in restricted substances – Verano estimates additional cash flow of close to $80 million annually from this change alone. It would potentially pave the way to legitimizing the industry, making it easier to operate like a regular business and improving access to financial services.
Future proofing
Still, industry veterans are cautious about placing their faith in the US government changing tune on cannabis, with the current diversification efforts an attempt to insulate their businesses no matter the outcome.
“I never want to be sitting here hoping and dependent on government legalization,” Tilray Chief Executive Officer Irwin Simon said in an interview.
Tilray has gone further than its peers to diversify, snapping up at least 12 US-based breweries. Just last month, it acquired four craft breweries from Molson Coors Beverage Co.
The move carries the risk of buying into a market in decline as each successive generation is less interested in drinking alcohol than the last. About half of 18- to 25-year-olds responding to a national survey said in 2023 they drank in the past month, down from about 60% in 2014.
“Beer is not going away,” said Simon, who also sees opportunities to leverage the booze brands’ distribution networks. “My objective is how do we make beer cool to drink.”
Some investors are skeptical of that rationale.
“I don’t think the brands carry enough weight to contradict the declining revenue profile of those products,” said Emily Paxhia, managing partner of Poseidon Investment Management, which invests exclusively in cannabis.
Similarly, Verano doesn’t see greener pastures in selling booze. “Alcohol is not on our radar,” Weiss said. “It’s sort of anathema to what we do in certain respects.”
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