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Another Consumer Goods Company Is Getting Into the Cannabis Industry

The Motley Fool logo The Motley Fool 3/9/2020 David Jagielski
a glass of beer on a table: Another Consumer Goods Company Is Getting Into the Cannabis Industry © Provided by The Motley Fool Another Consumer Goods Company Is Getting Into the Cannabis Industry

Cannabidiol (CBD) is rising in popularity as people learn about its potential health benefits, which range from relaxation, pain relief, and fighting inflammation to treating people with epilepsy. There's still a lot for researchers to learn about CBD and what it can and cannot do, but in the meantime, companies are putting the cannabis compound just about everywhere, from burgers to pillows to clothing. That's why many companies are getting involved, including consumer goods companies that see an opportunity to help boost their sales by getting in on a hot new health trend.

Unilever (NYSE: UL) announced last year that it would be entering the cannabis industry through one of its subsidiaries, Schmidt's Naturals. The latest consumer products company to enter the cannabis fray is Colgate Palmolive (NYSE: CL).

Colgate purchases Hello Products

In January, Colgate announced it would purchase an oral care brand, Hello Products. The company sells toothpaste, floss, toothbrushes, and other oral hygiene products. One of the reasons Colgate is excited about the deal is because of Hello Products' focus on young customers, with what Colgate CEO Noel Wallace calls "distinct on-trend positioning."

One of the trends that Hello Products is banking on: hemp-derived CBD. Shortly after the acquisition announcement, Hello Products announced on Feb. 4 that it would be launching a line of CBD products: mouthwash, toothpaste, and even lip balm that contains CBD.

The company says in its press release that the CBD comes from "hemp grown by partner farms based in the U.S." Although marijuana remains illegal in the U.S. at the federal level, hemp-derived CBD products are not, thanks to the farm Bill, and they offer a way for companies to stay on the right side of the law.

a close up of food on a table: Cannabis and hemp oil products. © Getty Images Cannabis and hemp oil products.

Why it's worth the gamble for Colgate

Getting into a new line of health products is a fairly safe bet for Colgate to make. It already makes similar non-CBD products, and adding a new line to its portfolio could potentially tap the company into younger markets and help find a new type of customer. However, it's still far too early to tell how popular CBD oral care products will be and whether they're any better than what's on the market today. But for Colgate, it's likely a low-risk move. Hemp-based CBD is legal, and since the products are sold through Hello Products, Colgate's name won't directly be associated with cannabis -- which could turn off some customers, as cannabis legislation is still a polarizing topic for many people.

And as for the opportunity, investors only need to look as far as Charlotte's Web (OTC: CWBHF), which sells hemp products, to see the potential that exists. Over the past 12 months, the company generated more than $93 million in revenue, and its products are sold in more than 9,000 locations across the country. Charlotte's Web isn't in oral care, but it does focus on health and wellness products, which have proven to be popular.

What does this mean for investors?

Getting into cannabis products, especially oral care products, likely isn't going to give Colgate's numbers much of a bump in sales. The company posted $15.7 billion in revenue in 2019, so generating even a 1% improvement would require revenue of nearly $160 million. For oral care, the market might not be there just yet. Brightfield Group estimates that the total CBD market was worth more than $4 billion in 2019, but that includes both hemp and nonhemp products. And even though it expects the U.S. CBD market to be worth more than $24 billion by 2025, it's unclear how big a slice of that pie oral care could claim.

If you were going to buy shares of Colgate, its purchase of Hello Products likely won't impact your decision. It's too early to know the impact of this acquisition and whether the products will be successful in generating any significant revenue growth. The important takeaway from this is Colgate's move into cannabis in any form, suggesting that there might be some interest in the industry and that it could lead to moves down the road should full legalization of cannabis in the U.S. make more progress.

It's a sign that there could be some more potential cannabis acquisitions this year. A cannabis stock like Charlotte's Web, for instance, would allow investors to tap into the hype surrounding hemp-derived CBD products.

David Jagielski has no position in any of the stocks mentioned. The Motley Fool recommends Charlotte's Web. The Motley Fool has a disclosure policy.

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