The Rise of a Half Billion Dollar Market in Canada
Cannabis edibles, topicals, and concentrates will be legalized later this month in Canada. Cannabis-infused beverages have emerged as a major trend within Legalization 2.0 with beverage manufacturers jumping at the chance to partner with licensed producers and tap into this new market.
For instance, HEXO Corp and Molson Coors formed joint venture Truss and will offer everything from cannabis-infused water to a ‘beer-like’ product and hot beverages. Alcoholic beverage behemoth Constellation Brands invested $5 billion for a 38% stake in Canopy Growth and plan to launch a line of cannabis-infused drinks and other products. Tilray partnered with Budweiser producer Anheuser-Busch InBev to research THC and CBD drinks in Canada, each company investing $50 million in the venture.
New Products Hit Shelves in December
The amended regulations regarding the production and sale of Legalization 2.0 cannabis products come into force on October 17, 2019, but retailers and consumers won’t see products online or in stores until December 16 and it will be a limited selection at best.
There are several reasons for the slow rollout. Federal licence holders must provide 60 days’ notice to Health Canada informing them of new products coming to market. Provincial and territorial regulators (the sole distributors in every province except Saskatchewan and Manitoba) need time to issue product calls and source new products. Retailers also need time to purchase and obtain the products for sale.
3 Million New Consumers and $2.7 Billion Market
Based on a 2019 survey, EY Canada and Lift & Co. predict Legalization 2.0 could bring in as many as 3 million new consumers. This new audience is not interested in or comfortable with traditional consumption methods and is drawn to more discreet and accessible ways to consume cannabis.
Legalization 2.0 could bring in as many as 3 million new consumers.
Deloitte Canada estimates the Canadian market for edibles and alternative cannabis products will be worth $2.7 billion annually. Extract-based products and edibles account for $1.6 billion of that number and cannabis-infused beverages represent $529 million.
Cannabis Beverages Experience Slow Growth in the US
In the US, concentrates and edibles are seeing continual growth and market share gain. According to BDS Analytics, beverages make up a small, but growing, portion of sales: approximately 6% of sales to date with a growth rate of 15% year-over-year.
In 2018, the YTD tracked edible sales in Arizona, California, Colorado, and Oregon combined was $612 million. BDS Analytics predicts total US edibles sales will reach $3.4 billion in 2022 and beverages will account for $374 million.
Despite these promising trends, the US market has not been without its challenges. Companies are unable to distribute nationally or effectively scale because of federal regulations.
Lisa Campbell, CEO of Lifford Cannabis Solutions and Co-Chair of Cannabis Beverage Producers Alliance, highlights other lessons Canada can learn from the US: “California has faced massive problems with dosage variability in its beverages,” she says. “Retailers have learned the hard way–with THC leaching into can linings–that packaging can impact dosage. There have been many product recalls.” Campbell notes that lab testing for cannabis food and beverages is also in its infancy making it difficult to get consistent results.
Challenges the Canadian market will Face
Beyond the obstacles noted above, Canadian producers, manufacturers, and retailers will face a number of challenges. Under current regulations, you cannot consume a cannabis beverage in a bar or restaurant; instead the product must be purchased online or in-person from a licensed store and consumed at home. Yet this is clearly not what consumers want or what the market needs to thrive. According to Deloitte’s 2019 report, “Both current (53%) and likely (47%) consumers see edibles as a product to be consumed socially among a small group of friends.”
Campbell echoes those sentiments: “In all cultures around the world, adult beverages are used as social ritual and as a means to have fun and come together as a community,” she says. “Legalization 2.0 brings a whole revolution of new products and new social rituals around them.” Campbell is optimistic regulations may change in the future to allow the consumption of cannabis beverages on-premise.
Adult beverages are used as social ritual and as a means to have fun and come together as a community.
When it comes to selling beverages, retailers will have to consider refrigeration, storage, and allocating space to maintain profitability. Establishing brand loyalty will also be difficult given marketing regulations. For example, Health Canada regulations prohibit a beverage alcohol company from displaying its logo or brand element on a cannabis beverage and labels cannot reference alcohol in any way.
Customer education and the role of the budtender will be very important to establish relationships with customers and to develop brand loyalty. Beverage companies will need to be innovative, clearly articulate what is unique about their product, and continually gather consumer data.
Retailers must also consider how Legalization 2.0 will impact their customer demographics. Millennial or younger consumers are generally more experienced cannabis consumers who already consume cannabis products. It is likely that novice or cannabis-curious consumers, often female and older, will be drawn to edibles and alternative products, especially baked goods, confectionery, and tea.
What products can Canadians actually expect to see as the beverage market develops?
In the US, cannabis-infused carbonated and non-carbonated drinks are most popular; however, BDS Analytics reports substantial growth in shots (+127%) and powdered mixes (+61%) categories in 2019. Over the past year, low-dose THC product sales and CBD beverage sales have also increased in the US by close to 70% and 75% respectively. BDS predicts continued massive growth for hemp or CBD beverages (+134%) and products specifically labelled as CBD (+1000%).
The types of cannabis beverages we may see in Canada include: drops, mixes, and elixirs, water, carbonated beverages, iced tea, lemonade, and fruit drinks, and tea is expected to be the most popular.
Deloitte’s studies show 35% of likely cannabis consumers see cannabis-infused beverages as an alternative to alcohol. Campbell agrees that mocktails are on the rise. “We have already seen the rise of low ABV drinks or mocktails in the hospitality sector,” she says. “Cannabis drinks are an extension of that and cannabis cocktails are a future trend.”
Consumers will also look for product quality, safety, and potency when choosing a cannabis beverage.
Will these predictions for a multi-billion dollar industry come true? Industry must watch, wait, and adapt as products roll out and regulations shake out.