Motley Fool Hidden Gems Investing - The Future Of The American Drinker

Episode Date: October 5, 2023

Beer continues to shine but will future generations be less likely to drink alcohol at all? (00:21) Bill Barker and Deidre Woollard discuss: - What’s driving the rapid growth of Modelo. - If wine and spirits can rebound for Constellation Brands. - The future of cannabis and Tilray’s tough path to profitability. (17:17)  Deidre Woollard interviews Joel Marcus, CEO of Alexandria Real Estate Equities about the future of this life sciences real estate investment trust. Companies discussed: ARE, STZ, TLRY Host: Deidre Woollard Guests: Bill Barker, Joel Marcus Producer: Ricky Mulvey Engineers: Dan Boyd, Heather Horton Learn more about your ad choices. Visit megaphone.fm/adchoices

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Welcome to Motley Fool Money. I'm Deidre Willard here with Motley Fool analyst Bill Barker. Bill, How are you today? I'm good, thanks. Well, it's got to be 5 o'clock somewhere, so we're going to talk booze today. First of all, we've got earnings from Constellation Brands. That's a portfolio of all types of brands, beer, wine, spirits. Also the proud owner now of the No. 1 U.S. beer, Modelo, which extended its lead this quarter. The company's investing heavily in brewing capacity in Mexico. The question I'm asking myself whenever I see a brand on top is, can it stay there?

What do you think? Is Modelo going to be on top for a while? Well, it's a beer company. Tell me how its advertising is going to do, how well it advertises. That's how it's going to do. That's what beer in this country is, is a successful advertising campaign or not. I can remember being at a conference some years back, and the Budweiser was presenting Anheuser-Busch. What the CEO came up and talked about was the Super Bowl campaign and the commercials. That was about half of his time. They're an advertising company which happens to make some beer. That's been driven home, of course, this year by Bud Light's trip-ups with its campaign and the boycott against it. Modelo just was featured in The

Wall Street Journal a couple of weeks ago for how successful its campaign is and the reasons behind that. Yeah. Part of that is its connection with Hispanic drinkers and the growing Hispanic population. It definitely plays to that in its ad campaigns. The other thing it's got is the Cholata, which is a little bit like a wine cooler. You've got beer with some lime and some salt. That has grown dramatically. I'm wondering if that's the new wine cooler, or the new hard seltzer, or the new drinking trend in general. Maybe. You'd have to ask one of the kids, which I don't qualify for these days. I don't know. Lime and salt and alcohol have gone

together historically very well, so why not? This is a taste and a combination, which is better known in Mexico, and is now being exported to us. Modelo is primarily good at reaching out to the Hispanic community and then expanding from there. As long as it stays true to its core audience, I think they'll do very well. Expanding beyond that is a great opportunity. but just keeping the very dominant role they have in their core community, a community which is growing in this country, it's a good demographic place to be if that's your core customers. They're in good shape. This Wall Street Journal article talked about the fighting nature behind its ad campaigns. I watched one of the commercials, and it was about a grandmother making tortillas,

which I would not have known was a good way to sell beer. But apparently it is. They know what they're doing. I would be quite confident that they'll continue to do so, given what they're focusing on. Yeah, it is a different type of ad campaign than what we've seen from a lot of beer makers in the past. I want to talk a little bit about the weaker side of Constellation right now, which is wine and spirits. They've got some good wine brands. Speaking of ads, you've probably seen those Kim Crawford ads with the women walking with the bottle. They've got Miomi as well, which they say are outperforming their category. But beer sales were up 12%, wine and spirits for Constellation down 14%.

It's still an over $400 million part of the business each quarter. But how should we think of Constellation. Is it more of a beer company, like you said earlier? It's far more of a beer company in terms of total sales. I think it's over 70% in beer vs. wine and spirits. One of the reasons maybe, Kim Crawford, I may have missed the commercials, they sound pretty exciting. Somebody who's walking with a glass or a bottle of wine, I'm surprised I haven't been stocking up, given the powerful nature of the campaign there. Yeah, Kim Crawford's a very successful brand, one of some. But sales are going down in that category for Constellation. I don't know. It's been a trend for a while. They certainly

got a little bit of a boost during peak COVID, when you could do little but stock up on alcohol and then drink it at home. So, that was a help for a little while. But the trend is not all that good in that part of the business. Yeah, I think that's one of the things that makes investing in alcohol companies tricky, because it is so taste-driven. There is brand loyalty. Modelo's got good brand loyalty. But you also have shifting trends. Boston Beer is a good example. They went all-in on hard seltzer, and now that is slowing. It's one of those things where I think you have to keep following the trends, and that's hard to do as an investor. Well, you combat that to degrees

by diversifying. Constellation has diversified across beer and wine and spirits, so they have some protection from taste changing from one of those categories to another. The expansion of non-alcoholic beer as a possibility, and these beer coolers and things. The top line continues to grow, but beyond the top line, the stock seems to be down today, despite the complete earnings report beating expectations. The wine and spirits numbers were troubling enough that that seems to be taking the stock down a little bit on a day when the market in general is down a little bit as well. One of the things that they missed on was trying to get into cannabis at the height of the craze, which sort of made sense at

the time. You just talked about, you want to have a diversified portfolio, you want to be ready for things. They spent around $4 billion for over a third of Canobie growth in 2018. Now, every quarter, it's just this little write-down at the end of the release with negative numbers. They don't even talk about it on the earnings call. It's been tough for Canopy Growth. They cut around 1,200 jobs over the summer. But now, there's just this little bit of optimism in the air due to the potential of the Safer Banking Act that maybe makes it easier for cannabis companies to get capital, maybe paves the way to U.S. legalization. and Constellation is hands-off with Canby Growth right now. Could that change? Is there

any way that they come back from this? I don't want to jump on anything you said, but you started out with, they kind of missed on this. This was just setting $4 billion on fire. This was as bad an allocation of capital as you're likely to see from this company and from most. I mean, this was an embarrassing mistake, I would say. The value of it is next to zero. They bought at the peak of the craze, and they've gotten nothing back on it, I would say. Will they get something back someday? Will there be some ability to combine alcohol and THC and all that in a way that provides some profit. I guess, if you write things down far enough, yes. But they haven't finished writing it down, I don't think.

No, they have not. It's still there every quarter. Let's talk about a company that's gone in the opposite direction. Tilray also reported this week that's a Canadian cannabis company, but now is also becoming a little bit of a beverage brand. We think of them as a cannabis company, they had five alcohol brands. They just acquired, it was official this week, eight more from Anheuser-Busch. All of a sudden, Tilray is the fifth-largest craft brewery in the U.S. with about 5% market share. Alcohol is not Tilray's core business. It's only around 14% of revenue. But if you're looking at Tilray as an investment, do you think of it as still primarily a cannabis business with just a little side of alcohol?

Of course I think of it as primarily a cannabis business, although the company is working hard to confuse people about that. For instance, their Wikipedia page, which I'm sure they've taken an edit at, describes Tilray Brands as a pharmaceutical cannabis lifestyle and consumer packaged goods company. OK, that's a lot. You would hardly know that their business is selling marijuana, which is their business. they can expand beyond that. I would say, buying brands from Anheuser-Busch is, consider who is choosing to sell and what Tilray's experience is there as to whether they got the better price on that. It definitely diversifies things, which they, I think, may need, given

the concentration, despite what they say. What is the pharmaceutical? The pharmaceutical is cannabis. The cannabis lifestyle, I guess I'm supposed to think that they're selling shirts with T-shirts that have weed slogans on them or something, rather than the weed itself. Maybe they do sell such T-shirts. I don't know. I think part of a cannabis lifestyle is cannabis. It's not that far from accurate. And consumer packaged goods, I think I know what the packaged goods are, it's there as well. They've got some beer brands. They've got to make a number of those that are not mass-market beers work for them. They've been allowed to burn up a lot of money over the last five, 10 years. They've continued to

to burn up money, but maybe someday they'll figure out how. The legislation does offer some hope, I think, to expand into the U.S. Yeah, and the market has been reacting to that. The cannabis business, it grew by 20% in the quarter. You mentioned they're burning money. They're still making acquisitions, not just on the alcohol side, but on the cannabis side, too. They're taking advantage of the fact that a lot of that boom is now these companies need to sell. Is this a constellation in the making, where you're going to have all of these things successfully together? If in a future where we have legalized cannabis across the U.S., does it then become more of the lifestyle company that it says it is

in Wikipedia? Maybe there's some moat possibility in the brand. I don't know. I think that once there's greater legalization, and I think of that as a when, not an if, I think that is the best thing that could happen for them and gives them an opportunity. I don't know how strong the Tilray brand itself is. The sub-brands for the marijuana, I'm sure most people out there know better than I do what those would be. But they need that opportunity. It's a big market that they could sell into. But absent that, the growth is mostly through acquisition. It's not organic growth. They're not really breaking out organic growth vs. the growth through acquisitions.

But the market is not growing in Canada at a rate that they can really point to as a growth company, other than rolling up other companies that are struggling even more than they are. Yeah. Our friend in the North, Jim Gillies, talks a lot about how there's a cannabis shop on every corner in his neck of the woods. One of the things I'm trying to figure out when it comes to alcohol is how younger people are feeling about drinking. So far, we're seeing Gen Z not as big drinkers as the millennials, who drank less than Gen X, who drank less than the boomers. So, all the way down, you're seeing less alcohol drinking, more people are choosing cannabis in the younger generations. I'm starting to think about alcohol. Is there

a way in which this goes the way of tobacco? Does alcohol fall that far out of favor? It's hard to imagine at this point, but there does seem to be a consistent trend happening here. Well, it's not as bad for you as tobacco. No, but it's not great for you either. It does a good job of muddying the waters on how bad it is for you, in terms of, well, maybe one drink. No, it's not going to fall as much as tobacco. Tobacco would have an extremely hard time today getting legalized if it were not already. But I don't that would be the same, would not be true of alcohol, I think. As you point out, it's

a declining volume intake by younger generations, but there are more premium choices, there are more mixes and flavors to go along with it. The industry does a good job of increasing choice out there. So, I think that that is continuing. And all these older generations aren't dying off that fast. I hope we're not! Even if the youngest generation is drinking less than all the other ones, the other ones are still around. So, it's not that bad a space. No, it's not that bad a space. But it is a space in which they're continuing to have to adapt at a rate that I think is higher than it was in previous years. In previous years,

you could have wine and you could have some beer and you could have some spirits, and it's a pretty good portfolio over time. Now, it seems like you're constantly having to innovate into new flavors, new things like hard seltzer. It seems like it's speeding up a bit. Yeah, I think it's a more complicated game. But the bigger companies, the Constellations, have a lot of experience at navigating how you target different ad campaigns to different segments and data on how to track what generations are doing in a way that I think Tilray is not as experienced in doing. They've got smaller brands, and I'm sure they'll do something with them, but I don't think

that they're in position to play from strength right now. Well, until you get a Super Bowl ad, you're still small potatoes, I guess. Well, there'll be plenty of ads at the Super Bowl. I don't know if the Modelo, I guess they'll be there. They're more looking at the other version of football for their ads than American football. True. Thanks for your time today, Bill! Thanks! Office real estate has been having a tough year, but life science real estate is still thriving. I chatted with Alexandria Real Estate Equity CEO Joel Marcus about Lab Real Estate and

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Well, we have to start with the sort of tough question, which is one of the biggest stories over the past year, of course, has been office real estate. You're a little sheltered from that due to your specific niche, but these larger forces, high interest rates, a concerning economy, how have they had an impact on your business? I think they all have. We're very fortunate. We do, as you know, lab space, which is infrastructure for the life science industry, which is essentially made up of biotechnology many pharmaceutical companies, many product and service companies that have technical requirements, academic institutions that do research, government research, and a variety

of uses that use essentially heavy infrastructure, which is totally different than office. The buildings may look like office, but they're very, very different. But the headwinds have been pretty tough. we started or we ended 2021 after what I call the rocket ship of COVID at about a 30 times multiple over our per share earnings. A year later, we found that cut in half, not because we did anything wrong, because our earnings last year were all-time high, and so far we've posted two really record-breaking quarters this year. But it was really a multiple contraction due to the headwinds of tough economy, as you point out, interest rates, worry over the secular

decline of office, whereas our industry, the life science industry, is a $5 trillion industry and is a secular growing industry. But a lot of investors have a hard time sorting through the chaff to really understand different stories. Yeah. So, coming off of that rocket ship, as you mentioned, there was so much energy and attention focused on life sciences during the pandemic. How are your tenants dealing with that? Are you seeing some companies taking less space or subleasing? What are you seeing? Well, I think it's fair to say what happened during COVID is you had about a 10-year that preceded COVID, about a 10-year which was very unusual. First time I'd seen it in the industry, the life science industry, a secular

bull market. And probably over that time, too much capital went into the sector so that companies that were either preclinical or even so early stage they hadn't even really shaped a vision of the future got funded. So you just had too many companies chasing too many targets for therapies and cures. And as COVID came along, that just almost geometrically increased it. In fact, during one quarter, I think it was 2021, we had 4 million square feet of leasing. That was a high for a whole year before that. So, the rocket ship was quite dramatic. Since that time, I think it's fair to say that with the pressures of the macroeconomy, interest rates, I think all the forces that are out there, companies have gone to a much

more, I think, cautious view, and it's become a kind of a just-in-time market today, so that the companies that are looking for space are primarily those companies, certainly big companies, institutional players have consistent demand and that hasn't really changed. But in the biotech sector, what's gone from just a total rocket ship has moved to a selective group of companies that have positive clinical outcomes or FDA approvals. Then they need space just in time. We need space today and we need a path for growth. So that's kind of where the big shift has been off of COVID. Interesting. So, with that, just in time that you're seeing, are those still longer leases once they start? They just come in a little faster than expected?

So, what happens is, it depends on the size of the company. If the company is getting FDA approval or well on phase three, oftentimes it's bigger space, longer space. If it's a company that's getting, say, phase one safety data or they're getting phase two efficacy data, they generally look at medium-sized spaces and medium-term leases because the path to growth may be very quick and they may have to move very quickly. So, they're a little hesitant to go to a 10- or 20-year lease, but it's common to see five or seven, sometimes 10, but more in the middle innings. So, it sounds like maybe you're having to build flexibility a little bit more into your game plan overall? Oh, sure. And we've always done that. We've gone from

startups to giant companies, and we've always had product offerings all along the continuum because we've realized that's just the nature of the industry. Well, and because you have this specific niche, there aren't many places that people can go when they need the specific things that you provide. So let's talk a little bit about that. What are some of the things that do make this so different from the traditional office space market? Well, number one, these buildings are clustered in great science centers, whereas office buildings, sometimes they're in central business districts, sometimes they're in suburban locations, sometimes they're in strip malls, they could be anywhere. Our buildings and

the buildings in this industry, by and large, tend to be aggregated in dense clusters that are made up of great science, great management talent, and risk capital. The buildings themselves are quite different because they have heavy floor loading capacity for heavy equipment, raised ceilings so that you can bring in waters, gases, and enhanced HVAC. It's really a different platform. We've talked a lot about your pharmaceutical lab space, but you've also got ag tech clients, which I find fascinating. I think the future of food is very important. How should investors be thinking about the ag tech part of the business and the potential for growth there? Certainly. Ag tech over the last half

a dozen years has probably had the steepest incline of investment, venture investment, that we've ever seen. For years, ag has been really dominated by a few international incumbents, But over the last handful of years, a lot of venture capital came to the sector because it was underfinanced and really underserved in a sense, starting a whole bunch of new companies. And so, we participated in that. We've been one of the most active ag tech investors over the last half a dozen years. And the prospect of building a greater sustainable food source rather than simply rely on traditional

Farming, I think, has caught the eye of a whole lot of investors, and it's become pretty interesting. We have a whole campus down in North Carolina in the Research Triangle, our AgTech campus, Advanced Technology and AgTech campus, focused on, we have a combination of laboratories with technical facilities, adjacent offices that support those, and then greenhouses, and we've had high demand down there for those facilities, both from larger companies and then earlier stage companies. So it's very, very exciting because if you think about human health, nutrition is a critical component, right? Oh, absolutely. And it's interesting because there have been some companies that have come out early, haven't necessarily done quite as well.

There's obviously so much potential here. Is it a case where these companies are still sort of emerging and you feel like there's more potential going forward? Is this an area that you think will expand? Yeah, I think venture capital has gone up maybe over the last six years, maybe four or five X, which is greater than most other sectors have ever seen, a little bit like an AI. But we're still in the really early days. We started a company, for example, that was primarily a software company, but it had the ability to use AI and software to create varieties, new seeds for different crops, high-value crops. So, you know, whether it be a high-value watermelon or kind of fruit that just was very differentiated versus

the kind of generic products that are out there. And that's the kind of companies that are being formed today, ones to meet just unusual needs. And we think there's great potential there. Last question for you. As a company, you're headed into your 30th year. You got started in a garage. Truly. So what are you looking for over the next 30 years to make the company successful? Yeah. So, we started in a basement of Jacobs Engineering not too far from where I'm sitting here in Seattle, in Pasadena. Seattle was just on my mind. But I think it's fair to say we think that what distinguishes a company over the long term is really what Jim Collins, the famous good-to-great author, has said. It really, you have to have over the long run

superior results. And we certainly have done that since the IPO. We've outperformed all the relevant indices by far. You have to have a distinctive impact. You have to have a mission that makes sense. So our mission is to improve human health and nutrition and providing the infrastructure that builds the future of life-changing innovation. And then you have to have lasting endurance. You can't just be like most developers are. They're merchant developers. Their saying is, buy it, fix it, sell it. We don't view ourselves as that. We view ourselves as long-term holders and operators. Those are the three, I think, essential elements which make a great and enduring company. As always, people on the program may

have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Deidre Thanks for listening. We'll see you tomorrow.