Vertical Integration Offers Profit Potential Within Growing Cannabis Industry

DENVER, Feb. 14, 2019 /CNW/ -- As the cannabis industry continues its impressive growth, acquisitions are leading to greater vertical integration.

• Companies within the cannabis sector are acquiring other organizations to benefit from valuable specialist knowledge and skills.
• Such deals allow vertically integrated value chains, as have also been applied in industries such as coffee production.
• This comes amid wider growth in the sector, which is drawing substantial outside investment.

Youngevity International Inc. (NASDAQ:YGYI) (YGYI Profile) is following the vertically integrated model, having recently acquired a company specializing in cannabis processing machinery. Tilray Inc. (NASDAQ:TLRY) is expanding its Canadian production facilities through the acquisition of another grower. Budweiser brewer Anheuser-Busch Inbev (NYSE:BUD) (OTC:BUDFF) has partnered with Tilray to produce cannabis-infused drinks. In addition, tobacco companies are investing in the sector, providing extra funds for companies such as Cronos Group Inc. (NASDAQ:CRON) (TSX:CRON). Specialist companies such as cannabis real estate finance company Innovative Industrial Properties Inc. (NYSE:IIPR) are also looking for entry positions in the industry.  

To view an infographic of this editorial, click here.

Cannabis Companies Turn to Vertical Integration

As the global cannabis industry continues to grow — with North America taking a leading role —  companies are eager to find ways to improve their productivity and stand out from the pack. A wide range of companies covering the production, processing, marketing, and sales of cannabis and cannabidiol (CBD) products are vying for a position in the space. So, what can give a company an edge?

Many are turning to vertical integration. By bringing together production, processing and distribution, companies can cut costs, improve efficiency and ensure quality control. It's a strategy that has worked well in other parts of the economy, but can it work for cannabis?

Acquisitions for Growth

This all-under-one-roof strategy is definitely one that the management at Youngevity International, Inc. (NASDAQ:YGYI) believes in. A leading omni-directional lifestyle company, Youngevity has recently moved into the cannabis sector through investment in CBD.

CBD is one of two significant active ingredients found in cannabis. Unlike THC, which until a few years ago was the best-known of these chemicals, CBD is not psychoactive and does not deliver the highs or mental impairment that comes with THC. In addition, recent research has indicated that CBD could have a wide range of beneficial effects for health and well-being, leading to a burgeoning market for CBD products. This promising research, along with a growing popular acceptance of cannabis, has led to a resurgence in the growth of hemp — a variety of cannabis that can be rich in CBD but low in THC — and hemp-based products.

Youngevity entered this market last summer, with the launch of its Hemp FX product line, which includes products designed to soothe muscle pain and help consumers relax. This has provided a new product offering for a company that has already seen success with its hybrid model of direct selling, social selling and e-commerce.

To expand upon this opportunity, Youngevity has recently acquired Khrysos Global, a large hemp and CBD machine manufacturing company. Khrysos's proprietary technology has been developed specifically to extract active ingredients from hemp and cannabis in order to provide the best possible yields from crops. The company also provides planning and consulting for cannabis companies looking to make use of technology in the extraction process.

"Our acquisition of Khrysos is extremely exciting on a number of levels," said Youngevity CEO Steve Wallach. "Beyond the fact that Khrysos' hemp-CBD extraction technology is far more efficient than most anything else on the market, we're acquiring a turnkey business model here. Their systems are applicable to the entire industry and are immediately implementable across our own line of HempFX products as well as in offtake agreements we have through our existing business relationships. We see this as providing not only immense value to our company, but also to our investors–by selling not just the extraction systems, but also servicing and operating those systems via a rental model, they will provide us with continuous, ongoing profitability."

Field to Finish

The acquisition is a natural move for Youngevity, not just because of the company's interest in the hemp market but because of its established business model. This model, which the company refers to as "field to finish," has been tested and proven through its CLR Roasters subsidiary.

CLR is invested in every stage in the coffee production process, from farming and green coffee distribution to roasting and sales of branded goods. Its vertically integrated model includes a plantation and dry-roasting facility in Nicaragua, established U.S. facilities and sales networks, and its own coffee brand. This comprehensive approach allows the company to control the entire process of coffee production from the field to the consumer's cup, not only providing profit at every stage but ensuring the quality and the reputation of the company's own products.

The acquisition of Khrysos and a 20 percent ownership stake in the Carolina Cannabis Company will allow Youngevity to establish a similar model in the cannabis sector. By taking ownership of the production, processing, branding and sales of CBD products, the company plans to profit from every stage in the process and ensure that its products are produced both efficiently and to the highest standards.

The acquisition brings the skills and experience of Khrysos's technical and managerial staff in house at Youngevity, another critical advantage. The cannabis sector is still in its early days, and companies are regularly refining their processes the industry continues to evolve and grow. Having specialist knowledge about the equipment used in processing cannabis can only help the Youngevity optimize its processing systems, ensuring efficient manufacturing and a smooth supply chain.

Like any business savvy acquisition, this deal stands to benefit both the purchasing company and the one it is taking over. Youngevity's scale and experience in reaching customers is designed to allow Khrysos's technology to reach a wider market. Being part of a larger company provides an opportunity for Khrysos to expand, scaling up its equipment and advisory business.

"This is an exhilarating time for us," said Dave Briskie, president and CFO of Youngevity. "This is just the first step Youngevity plans to take as we look to continue developing in the hemp-derived CBD industry. Right now, that industry is expanding so quickly that companies are struggling to keep up with demand. So acquiring the production capabilities of Khrysos, and adapting a creative model that allows us to upscale the usage of its technologies across our own properties and the properties of our partners — I feel — really stakes our claim within the industry at large."

An Industry Expanding

Youngevity's work represents only one part of a broader wave of expansion for the cannabis industry.

Canadian cannabis company Tilray Inc. (NASDAQ:TLRY) is among those using acquisitions to fuel growth. Tilray recently announced the pending acquisition of Natura Natural Holdings Inc., another Canadian company. Valued at C$70 million, this deal will increase Tilray's growing space by 662,000 square feet, a significant expansion in an industry based around self-contained indoor agricultural facilities. An innovator in the cultivation, production and distribution of cannabis products, Tilray has has also established subsidiaries and affiliates in Europe, the Pacific, and Latin America, the latter through the recent establishment of Tilray Latin America SpA.

Like Youngevity, other companies with experience outside cannabis are now making moves into the sector. Anheuser-Busch Inbev (NYSE:BUD) (OTCPK:BUDFF), the brewers of the iconic Budweiser beer, is the latest in a series of beverage companies to make this move. The company has created a partnership with Tilray to explore the potential of cannabis and CBD-infused drinks. It's a substantial deal, with each company planning to invest $50 million in the venture, and though it will initially be limited to the Canadian market, if the venture proves successful, the potential to grow in the Unites States is significant.

Tobacco companies are an obvious fit for the cannabis sector, which could provide them with an alternative revenue stream as health-conscious consumers turn away from tobacco. Altria, the company behind such famous brands as Marlboro and Benson & Hedges, has invested C$2.4 billion in Canadian cannabis company Cronos Group Inc. (NASDAQ:CRON) (TSX:CRON). Canada is a good starting place for a company entering the cannabis market, thanks to the legalization of recreational cannabis in the country last October, but the investment in Cronos represents a broader opportunity. With business in Latin America, Europe, Australia and Israel, Cronos will provide Altria with access to a global cannabis market.

As well as attracting big players from the wider economy, the growth of the cannabis industry has supported the emergence of specialist companies within the sector, such as Innovative Industrial Properties Inc. (NYSE:IIPR). Founded in December 2016, Innovative Industrial Properties is a pioneering real estate investment trust that provides real estate capital for the medical cannabis industry. The illegality of cannabis at a federal level in the United States has made it hard for companies to acquire regular sources of funding, such as bank loans when buying property for cannabis production. There is therefore a substantial market for the company's funding, and an opportunity for both sides to profit from such finance.

The growing cannabis market has produced companies specializing in many different areas. By bringing these specialties together, vertically integrated companies have a chance to increase profits and profit from this remarkable growth.

For more information about Youngevity International, please visit Youngevity International, Inc. (NASDAQ:YGYI).

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