Shares of New Age Beverages (NASDAQ: NBEV) skyrocketed Monday on news that the beverage-maker will be selling three of its drinks in Walmart (NYSE: WMT) stores nationally.
The news was a clear win for New Age, which launched a new portfolio of CBD beverages last October, and its shares jumped 39%. But the implications for Walmart were less clear. Importantly, the agreement doesn't include any CBD drinks; instead, Walmart will be selling three flavors of Marley Mate (pronounced Mah-tay) in its stores for now. But the investor reaction seems to indicate optimism that the partnership could pave the way for future CBD-beverage sales between the two companies.
Image source: New Age Beverages.
This isn't the first time there have been rumbles about Walmart getting into the cannabis industry. Last October, ahead of Canada's legalization of recreational marijuana, Walmart Canada told Hemp Industry Daily that the company had been doing some preliminary fact-finding on the issue, but was not yet planning to sell CBD.
Though Walmart's origins are socially conservative, as founder Sam Walton wanted the brand to be family friendly, in recent years that positioning has changed. Walton downplayed the retailer's alcohol sales, but Walmart has recently made efforts to expand its business in beer, wine, and spirits. Similarly, CEO Doug McMillon surprised many when he urged the governor of Arkansas, Walmart's home state, to reject a bill that would restrict gay rights.
In that vein, it wouldn't be surprising to see Walmart embrace CBD, the non-psychoactive component of cannabis used for medical benefits. And there are good business reasons for the company to make the move as well.
1. The category is Amazon-proof
Beverages are one of the most inefficent items to sell online. Reports have recently emerged that Amazon (NASDAQ: AMZN) is moving away from selling heavy, bulky, and cheap products like bottled water, because the company can't find a way to sell them profitably. Such a product should be catnip to a company like Walmart, which is not only the country's largest retailer, but also its biggest grocer. CBD beverages are also the kinds of products that represent an excellent use case for Walmart's fast-growing grocery pickup service, which allows customers to enjoy the convenience of ordering online but defrays unnecessary shipping costs for Walmart.
2. It's a rare growth category
Products with blockbuster growth potential don't come along often for a company like Walmart. The retailer makes money selling everyday items like food, apparel, electronics, and home goods, and there's generally little innovation in those cateogries. However, CBD beverages and other products have the rare potential to deliver high growth for retailers like Walmart. For instance, the Brightfield Group, a cannabis analytics firm, projected that CBD sales could grow at compound annual rate of 147% through 2022, going from $591 million last year all the way to $22 billion.
While one category alone is unlikely to move the needle for a company the size of Walmart, it behooves the retailer to compete in a market primed to be worth $22 billion in just a few years.
3. It's a high-margin product
Unlike dried marijuana flowers, CBD has generally proven to be a high-margin product, as consumers have proven willing to pay up for CBD oils, beverages, and other such items. Charlotte's Web (NASDAQOTH: CWBHF), the market leader in CBD, posted a gross margin of 75% last year on revenue of $69.5 million, and an operating profit of $15.5 million, making it one of the few profitable pot companies.
While retailers don't normally claim most of the profits from the products they sell, CBD is less price-competitive than many of the categories Walmart normally competes in, like groceries. A company of Walmart's size can also squeeze suppliers and has the scale to generate other price advantages that its competitors can't match, so it should be able to realize higher profits on CBD beverages than on most of the items it sells.
4. It can bring in new customers
A novel product like CBD drinks could have benefits for Walmart in addition to sales of the drink itself. CBD-based products can act as traffic drivers for a store like Walmart, bringing in customers who are then likely to buy more items at Walmart, or maybe even do their regular food shopping there when they've already made the trip.
New Age has indicated it plans its own marketing push to drive customers to Walmart stores, saying, "Across Walmart stores New Age will be running hyper-targeted GeoFraming campaigns to drive foot traffic at the store level, encouraging pull-through with digital couponing, awareness, and trial campaigns."
If Walmart were to begin selling New Age CBD beverages, the company would likely make a similar push.
5. Walmart can gain a first-mover advantage
No other retailer has the size or reach of Walmart. The company claims to have a store within 10 miles of 90% of Americans, and can reach even more with e-commerce and its grocery pickup and delivery programs. While a first-mover advantage is difficult to achieve in retail, especially as CVS (NYSE: CVS) and Walgreen's (NASDAQ: WBA) have already announced plans to sell CBD products, Walmart can still beat its closest rivals to the punch and develop relationships with early adopters and new customers, creating barriers to entry against other retailers who later choose to sell CBD.
Whether Walmart eventually breaks into CBD remains to be seen, but New Age Beverage is clearly angling to get its marquee product into the retail giant's stores. Expect an update when New Age reports first-quarter earnings next month.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Jeremy Bowman owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon. The Motley Fool recommends CVS Health. The Motley Fool has a disclosure policy.