Cannabis Beverages: Still the Next Big Thing or Not So Much?

There has been much anticipation for new cannabis products since the Canadian government first announced that cannabis would be legalized for recreational use across Canada. While many were excited to see topicals, extracts and (food) edibles enter the legal marketplace, the anticipation of cannabis infused beverages was perhaps second to none amongst new legal cannabis products. This was due to, in part, the fact that unlike most other classes of cannabis, the legacy market had suffered from an inability to produce beverage products on a meaningful scale due to lack of the technology needed to properly create cannabis infused beverages. 

The excitement for the legalization of cannabis infused beverages stemmed from a variety of areas. Some tout beverages for the potential health benefits of the delivery system over other formats (such as smoking). Others view these beverages as not only a viable alternative to alcoholic products but also potentially a major disruptor for the alcohol industry. Others see beverages as a potential means of introducing cannabis products generally to non-cannabis consumers who may be more willing to try consuming cannabis for the first time if it is in a beverage form. These reasons, either individually or in combination, have led many to tout cannabis beverages as “the next big thing” and an important category in the cannabis market.  Others remain of the view that flower will always be king (or queen) and that consumer demand for beverages will never match the forecasting that some industry analysts and participants predict. To help figure out if cannabis beverages are to be the next big thing, or not so much, it is helpful to first look at the regulatory and legal framework in which these beverages can be manufactured and sold. Doing so can provide guidance as to where beverages currently sit in the marketplace, what challenges they face, and where they may go from here.

Regulatory Framework

The Canadian government legalized the recreational use of cannabis on October 17, 2018.  However, beverages (and other classes of cannabis) were not legalized until one year later on October 17, 2019. The reason for the delay was relatively straight forward; legalizing cannabis use was a big deal to begin with, and beverages (and edibles) are a much more complicated product than dried flower. As such, the Canadian government wanted to take additional time to assess and carefully think through what the regulatory regime would look like for edibles and beverages.

Perhaps not surprisingly, more complicated products mean more complicated regulatory regimes. Cannabis infused beverages are classified as “edible cannabis” pursuant to Schedule 4 of the Federal Cannabis Act. They are therefore not only subject to the rules and regulations set out in the Cannabis Act, but also other legislation such as the Food and Drugs Act. 

There are a number of Cannabis Act rules and regulations that are unique only to the edible class of cannabis. While too lengthy to discuss in this article in their entirety, we will look at some of the rules and regulations which, in our view, closely impact the future success or failure of cannabis beverages.

Processing License (or Micro Processing License) Requirement

In order to produce cannabis infused beverages, a producer must obtain a processing or micro-processing license from Health Canada.This type of license permits producers to take cannabis in its natural form and process it into various permitted forms such as oils, creams, extracts, concentrates, edibles and beverages. These licenses are site specific and derivative cannabis products can only be created in the producer’s licensed facility. This presents a high barrier to entry for anyone looking to produce beverages, as they must first obtain a license, which is a long and capital intensive journey. Moreover, Health Canada has imposed the requirement that cannabis beverages and edibles in general must be produced in separate facilities from ones where non-cannabis beverages are made. This means that existing facilities where non-cannabis beverages are produced, like water or soda bottling factories, cannot simply be licensed to process cannabis beverages, and as such those existing facilities cannot be leveraged. The need for new facilities creates a significant barrier to entry because of the added capital cost.

The onerous and lengthy process of obtaining a license prohibits traditional beverage makers from quickly adding cannabis-infused beverages to their existing product lines. It also creates additional hurdles for established American cannabis beverage companies to entering the Canadian market. As a result, companies with the existing knowledge to execute on cannabis-infused beverages cannot, by and large, enter the market quickly, and those with the licences already in hand require time to build up their knowledge base, or establish appropriate business partnerships. It is not to be totally unexpected then for there to be a longer runway before consumers find cannabis stores stocked with a wide array of high-quality cannabis-infused beverages.

Packaging and Promotional Restrictions

As with all cannabis products, packaging, labelling and advertising regulations are very strict in the industry. Uniform packaging that is generally unappealing and the inclusion of prominent warning labels make it difficult for cannabis products to attract the same attention as less regulated substances such as alcohol. Any kind of traditional promotion is generally prohibited unless it is done in a forum where youth are not permitted, and even in such instances, the promotion must not “evoke a positive or negative emotion about or image of, a way of life such as one that includes glamour, recreation, excitement, vitality, risk or daring”. As one would expect, it can be quite difficult to advertise to individuals without connecting on some kind of emotional level. 

Many see cannabis beverages in direct competition with alcohol, being a disruptor to this industry as some may choose cannabis beverages as a substitute for alcohol. However, as mentioned, the alcohol industry is far less regulated from an advertising perspective, and therefore has an inherit advantage when it comes to marketing. Moreover, from a distribution perspective, alcohol is much more available to consumers than cannabis, being sold in a variety of locations such as grocery stores, restaurants and bars. By comparison, cannabis products may only be sold in licensed cannabis stores, where no young persons are permitted even to enter. 

Regulators have been clear to keep the distinction between the two substances. Cannabis products are not permitted to have an alcohol content level of more than 0.5%. It is prohibited to promote cannabis products in any way that would reasonably associate them with an alcoholic beverage. For example, packaging a cannabis beverage in a beer bottle would be prohibited, as would labelling the beverage with words like “beer”, “ale”, “pilsner”, etc. 

Equivalency Chart

The Cannabis Act imposes a 30 gram purchase/possession limit of cannabis, and equivocates 70mL of non-solids containing cannabis (e.g. beverages) to 1 gram of actual cannabis, regardless of what the actual THC or CBD concentration in the beverage is. This means that given the standard 355mL size of beverages typically sold, consumers cannot purchase more than 5 beverages per visit to their cannabis retail store or online. This can make the purchase of cannabis beverages limiting and tedious if one is intending to purchase medium to larger quantities and makes purchasing cannabis-infused beverages for gatherings or entertaining essentially impossible to do with the same ease that can be done with the purchase of alcohol.

Trends to Date 

While not much exists in terms of historical data, the Ontario Cannabis Store published in its most recent quarterly report that cannabis beverages currently form 1.6% of total cannabis sales in Ontario. According to a report by Fortune Business Insights, the global cannabis beverage market was valued at a mere USD 367.4 Million in 2019 and is projected to reach USD 8,521.6 Million by 2027. This major growth projection indicates that not only is the market expected to expand, but that beverages will need to make up a larger portion of sales in order to achieve this target. Given the challenges pertaining to marketing, promotion and packaging, set out above, one could argue that the beverages market simply needs more time to grow organically while some customers self-discover this new category. 

According to a report published by Mintel, 66% of non-cannabis users who are open to trying cannabis would be interested in consuming it in an edible or drinkable format. As such, cannabis beverages have strong potential to bring new consumers to the market as an entry-type product. 

Due to decreased investment in the cannabis sector and the restrictions brought upon by the pandemic, it has been a slow start for cannabis beverages as many licensed producers have been occupied with downsizes and liquidations, and have not had as much opportunity to innovate new products. In addition to the capital resources required to make beverages, there is also a greater technical knowledge component than other product formats. For example, early issues arose in beverage shelf-life as licensed producers were struggling to find aluminum liners that would not absorb the cannabis and reduce the potency of the drink.

It would seem that investment from companies with such expertise, such as Constellation Brands (the owner of Corona beer) in Canopy Growth Inc., and the joint venture between Molson Coors and Hexo Corp. (Truss Beverage Co.) have provided these companies with the synergy needed to give them a head start in this category. Canopy launched the first cannabis beverages into the market in March, 2020 with its soda option. Truss Beverage Co. has quickly developed a line-up of five new beverages ranging from sparkling waters, juices and beer-like tasting beverages. These partnerships and investments are seen as a natural hedge for alcoholic beverage companies, since cannabis beverages are set to compete directly with alcohol, and in many cases, act as a direct substitute. The Ontario Cannabis Store currently carries 18 brands of cannabis beverages. In time, cannabis licensed producers will certainly innovate a variety of new products as this category can provide a greater means by which to differentiate one’s brand.

While THC drinks seem to lead the way, there is certainly room to expand both THC and CBD offerings, which are the most prominent cannabinoids in cannabis products. THC, which produces a psychoactive effect, seems to currently be more prominent in ‘hard’ drinks that are more likely to compete directly with alcohol, whereas CBD, which is perceived to have greater health benefits and no psychoactive effect, is being used more commonly in drinks like water and tea that are more likely to compete with natural health products. According to Mintel, approximately 46% of cannabis consumers are using it for recreational purposes, meaning that more than half are either medical or wellness-based usage, such as relaxation, anxiety and sleep. 

Much like the overall market, cannabis infused beverages are still in their infancy. With only a year of public availability, we expect this category to grow not only in the number of brands available, but also in the innovation of new products and improved quality and consistency. Although cannabis beverages have some regulatory challenges that are potentially holding them back from taking off, there is some great potential that exists for those players with a strong product and creative marketing. Some industry participants have taken a wait and see approach, but it is clear that the beverage category brings a diversity of new offerings to a market that some see as being highly commoditized. Cheers to the exciting opportunities ahead.

This article was originally published by Business of Cannabis.

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