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• Big cannabis companies like Tilray and Canopy Growth are expanding into beverages.
• The moves come as they lose market share in Canada’s competitive industry for recreational cannabis.
• These companies are trying to figure out how to give their revenue — and stock prices — a boost.

It’s hard to make money in cannabis, so the world’s largest cannabis companies are pivoting.

They’re slowly but surely getting into beer and sports drinks, too.

The Canadian cannabis company Tilray in early November acquired Montauk Brewing Company, a New York craft-beer brewer. Tilray already owned SweetWater Brewing Company, an Atlanta-based craft brewer, and Breckenridge Distillery, a Colorado whiskey brand.

Tilray’s competitor Canopy Growth, one of the world’s largest cannabis companies, is the majority owner of BioSteel, a sports-beverage brand that has sponsorship deals with professional sports teams such as the Toronto Raptors and the Dallas Mavericks as well as high-profile athletes including Kansas City Chief quarterback Patrick Mahomes.

And both companies are led by executives with experience running traditional consumer-packaged goods and beverage companies. Tilray CEO Irwin Simon used to run Hain Celestial Group, a food and supplements company. Canopy Growth counts the Corona beermaker Constellation Brands among its largest investors and is run by David Klein, the alcohol giant’s former CFO.

‘Trying to be something different’

“I’m trying to be something different,” Simon said in an interview. “I’m trying to create the next generation of a cannabis, beer and spirits company that no one else is doing out there.”

He says that while the market might think of Tilray as just a “cluster of businesses,” his goal is to build intelligently around Tilray’s brands — like Diageo or AB InBev, but with pot.

Courtesy of Aphria

Both companies have lost market share in Canada’s competitive legal market, according to analysts at Cantor Fitzgerald, and recreational cannabis is a shrinking chunk of their overall revenue. The bright spots, analysts say, appear to be their non-cannabis businesses.

After Canopy reported its financial results on November 9, analysts mostly addressed the company’s beverage business and highlighted the company’s continued challenges in making money selling pots.

Canopy’s core cannabis business saw revenue tumble 27% compared with the same quarter last year, while BioSteel revenue nearly quadrupled, according to the company’s filings. Canopy brought in 52.3 million Canadian dollars, or about $39.1 million, from its core Canadian cannabis business, and another CA$10.6 million from its international cannabis business, while BioSteel brought in about CA$30 million.

In a November 11 note, analysts at the investment bank Jefferies called Canopy’s core Canadian cannabis business “a sideshow.” Cowen analyst Vivien Azer said the company’s revenue beat was “driven almost entirely by BioSteel.” Analysts from Stifel continued their “Sell” rating on the stock while touting BioSteel as one of the few successful units at the company.

Canopy, for its part, announced a complex plan in October to plow into the more lucrative US cannabis market, through options it has to purchase three US cannabis companies and report their results on its balance sheet — which would surely give its cannabis revenue a boost . But Nasdaq, where Canopy is listed, objects to parts of the plan, so its fate is unclear.

“While we remain focused on our core cannabis business, our high growth CPG strategy anchored by BioSteel is showing impressive performance as the brand consistently achieves record quarter-over-quarter revenues and continues its rise to the top of the sports hydration category,” a Canopy Growth representative, Jennifer White, told Insider in an emailed statement.

She added that cannabis remained a core component of Canopy’s business and that the company’s mergers-and-acquisitions strategy would be focused on building out Canopy’s capacity in the US cannabis market.

Klein, the Canopy CEO, previously told Insider he’s focused on the US and wanted to be “on the fast-track” to enter the US cannabis market when he’s able to do so.

Tilray’s cannabis business slumps, while beer booms

Like Canopy, Tilray’s core cannabis business is also declining while its beverage unit and other businesses are growing.

Tilray’s cannabis revenue declined 17% in the quarter that ended August 31, compared with the same period last year, while its alcoholic beverage business saw revenue climb 34%.

In January, Tilray changed its corporate name to Tilray Brands to reflect the company’s “evolution from a Canadian LP to a global consumer packaged goods company powerhouse,” the company said in a press release.

To be sure, Tilray’s beverage business still accounts for only a small fraction of its total business. In the most recent quarter, it accounted for 13% of revenue, up from 9% a year earlier. The company’s cannabis business, on the other hand, accounted for 38% of revenue, down from 42%.

Tilray has been expanding its international medical cannabis businesses as well and owns Manitoba Harvest along with other hemp-and-CBD wellness units that account for a combined 49% of revenue. The company also has an option to acquire a majority stake in the US cannabis retailer MedMen but, like Canopy, isn’t able to close the acquisition until US federal regulations permit.

AP/Toby Talbot

Cannabis companies are hurting, so they’re looking beyond the pot

So what’s pushing these companies to get into beer and other beverages?

For one, stringent regulations on cannabis branding and high taxes squeeze margins both in Canada and in the US.

Second, it’s becoming clear that cannabis is becoming a cheap commodity, like corn or soybeans.

And third, oversupply in Canada and some US states, along with the persistent illicit market, have pushed many legal cannabis sellers out of business.

Take a look at Tilray’s stock: Shortly after Canada legalized cannabis in 2018, Tilray’s stock shot up to nearly $150. It then began a precipitous decline, and it’s now worth just over $4 a share. Put it this way: If you invested in Tilray’s initial public offering, you’ve lost nearly 90% of your money. Canopy Growth’s Nasdaq-listed shares trade more than 70% below their IPO price.

Beyond cutting costs, it was, therefore, only a matter of time before the world’s largest cannabis companies, with investors and shareholders breathing down their necks, looked elsewhere to boost their margins.

As Tilray’s Simon put it: “Either I’m real crazy, or I’m real smart. Not kidding.”