Guest blog post by Harvest Moon Research from Smart Money Gains
The announced partnership between Arizona Beverages & Dixie Brands is the most significant CBD beverage partnership to date for any MultiState Brand Operator (MSBO). Although much of the cannabis beverage talk clamours around the potential of AB InBev, Diageo, Pepsi Co and Diageo entering the fray, Arizona Beverage Co. reaching a licensing agreement with Dixie Brands Inc. is a monumental deal for the entire cannabis space.
As Constellation Brands billion-dollar investment in Canopy Growth became the market catalyst for the sector in 2018 this will be a catalyst for the sector this year.
Heineken’s new brew, from California beer brand Lagunitas, is made with marijuana instead of alcohol. Hi-Fi Hops is currently only available in a select number of dispensaries in California, where cannabis is legal.
With that said, Arizona Beverages parent company in Hornell Brewing Company is no slouch either and the company should be an ideal strategic partner for Dixie Brands.
The timing of this deal between Arizona and Dixie Brands is ideal and Arizona Chairman Don Vultaggio stated “ Dixie Brands is well-positioned to “lead and seize” a new “generation-defining” opportunity like cannabis-infused beverages.”
Chuck Smith, CEO Dixie Brands described it: “Arizona is a power brand.”
Since 2010 DIXI it has been leading the ‘House of brands’ industry through research, education and advocacy in the cannabis beverage marketplace. By first creating its flagship product line of Dixie Elixers using pure extracted THC the company has now expanded to over 30 different products across 100+ SKUs. Their products include edibles, tinctures, topicals and extracts and the company generated $5.8m USD in revenue for 2018 from its product catalog. The cannabis beverage marketplace remains to be foundation of Dixie Brands & for good reason, as CBD drinks alone, are expected to reach $260 million in sales by 2022, according to analysts at Canaccord Genuity.
The deal, which is subject to approval by Dixie’s board, also gives Arizona the right to buy a stake of up to $10 million in the cannabis company. A substantial amount considering that Dixie Brands market cap is regularly below that of $100m USD. The option is at an exercise price of $0.59 for a term of 24 months. Dixie Brands and Arizona have 45 days to strike a definitive agreement from the signing of the letter of intent.
The partnership will see Dixie create a variety of beverages that could include tea, lemonade, soda, coffee or seltzer that are to be sold in licensed dispensaries across North America. The initial term of the partnership is three (3) years, with an option to renew for up to two (2) additional terms of two (2) years each. However, the end game here is to corner the legalized CBD ‘consumer packaged goods’ market with the Arizona Brand name.
“You’ve got to be willing to try things,” said Don Vultaggio, Arizona’s chairman and CEO, who runs the company with his two sons. “The upside is we’re one of the first ones in an emerging space.”
A comparable case study to that of what’s currently transpiring between Dixie Brands and Arizona Beverages is New Age Beverages NBEV. The announcement that the company was planning on producing and distributing a line of Marley + CBD drinks caused the stock price to surge 600%+ in 2018. The company again jumped 37% upon announcing its products will be available in Walmart.
Another example was when DavidsTea DTEA stock price drastically surged more than a 100% in a week in late 2018 on just a rumor that it was considering added CBD teas to it’s collection.
Unfortunately, the highly anticipated US launch of CBD-infused beverages are now likely to be delayed until 2020.
Brent Willis, CEO of New Age Beverages and a former Coca-Cola and Anheuser-Busch InBev executive, calls CBD “one of the biggest opportunities to hit the consumer goods industry in years.”
Dixie Brands also has the possibly to involve itself with Molson Coors by taking advantage of the outstanding relationship that Arizona has with Molson Coors. The US division of Molson Coors Brewing Company, MillerCoors, recently entered into a partnership agreement with Arizona Beverages to market and distribute Arnold Palmer branded beverages.
Ready-to-drink teas in the US, both non-alcoholic and alcoholic, have been growing double digits for several years and Dixie Brands has the ability to capture the momentum from Arizona’s already established national tea is a second most consumed drink after water and the number of Americans that drink the beverage exceeds 158 million, which is half the U.S. population ( according to the Cleveland, Ohio-based Academy of Nutrition and Dietetics in Beverage Industry’s June issue).
Global sales will top 116 billion dollars in the next five years according to Grand View Research. The iced tea market is segmented as flavor options which allows Dixie Brands explore limitless product collaborations with Hornell Brewing and Arizona Beverages. Iced tea’s versatility makes it possible for businesses to adjust to a CBD market looking for less sugary products.
It’s expected that the initial roll-out will focus primarily on Lemon and Peach flavored iced tea as they’ve historically been the most consumed across the globe. The ready to drink tea category accounts for 46% of total tea volume in the US and in 2018 it increase both in volume and value, reaching an estimated $10.75 billion, according to Beverage Market Corp. projections.
Arizona is infamously known as the maker of the 99-cent iced tea can. However legally purchased CBD oil prices range upwards of $0.10 a milliliter (ml). Consumers therefore can expect an increase in product price point for the addition of CBD, depending on the dosage, royalty payment and cost of the CBD. Dixie
Brands should expect to enact a modest price increase to current Arizona tea products generating modest gross profit margins, all in hopes of being competitive within the ready drink tea marketplace with introduction of CBD. The ability to achieve high gross margins through restricted dispensary sales in America will eventually be replaced by a global distribution network that can successfully undercut the competition. That’s what Arizona has historically achieved and that is hopefully something they will pass onto Dixie Brands.
While any CBD ready to drink tea deal with Coca Cola would ultimately dwarf that of Arizona Beverages & Dixie Brands. Industrial markets globally have declared war on sugary drinks. It is evident that blue chip stocks have been reluctant to involve themselves with Cannabis as the sector remains to be a contentious issue. This factor is making Arizona RTD teas and CBD the most appropriate choice for the time being.
This is already beginning to be reflected in the overall consumer goods marketplace as data is showing that more than half of consumers (53%) are quenching their thirst at convenience stores where RTD teas are sold and soda pop sales have experienced a 15-year decline. Sales margins for refreshment beverages averaged 42% last year and that number is even higher for waters and tea and nearly double the 22% earned on beer according to the National Association of Convenience Stores (NACS).
The Arizona Beverages strategic partnership gives Dixie Brands the power to vastly expand its product catalog and overall sales. Therefore, investors should be very pleased with the announcement as it fast tracks Dixie Brands’ plans to double its manufacturing and distribution footprint in 2019.