Cannabis-infused Drink Makers Prepare for Regulations

LEGALIZATION 2.0 COVERAGE

One year after Canada completed the federal legalization of recreational marijuana, the nation will now open its market to novelty products infused with the drug. This includes edibles such as cookies and gummies, as well as cannabis beverages, which will be introduced to the market in an attempt by legal producers to tap into a replacement product for alcohol.

As such, on the eve of the launch of this second phase of the marijuana market in Canada, the Investing News Network brings investors a collection of stories and interviews on the impact this opening will have.

As expectations bubble up for the upcoming marijuana-infused beverages market, stakeholders are learning how to adapt to the regulations for these products.

Like dried flower products, cannabis drinks will face strict regulations once they become available for sale later this year in Canada.

Following the confirmation of guidelines from Health Canada, the industry is gearing up to deliver on the promise of these drinks.

With the legalization of cannabis edible items projected to attract 1.5 million new consumers in Canada and infused drinks expected to secure revenues of C$529 million per year, marijuana companies have set a target to deliver novel beverages to the market.

Elliot Johnson, chief investment officer and chief operating officer with Evolve ETFs, previously told the Investing News Network (INN) that he is excited to see the beverage market develop due to the investment entry of established alcohol players.

“Big alcohol and beverage companies are very interested and believe that there’s something there that matches their product line,” he said.

Johnson said that, once the market notices some of the early winners of the cannabis-infused market, he expects the makers of those drinks to become acquisition targets for larger marijuana players or, potentially, established beverage makers.

Investments from established partners into the cannabis market have investors excited about the potential for these beverages to be a home run from the get go. However, Health Canada has warned stakeholders that the roll out of the whole cannabis edibles market will be slow.

Health Canada offers clarity on edibles and infused regulations

In June, Health Canada unveiled its regulations for the roll out of edibles and infused products, including beverages.

The federal government confirmed the regulations will come into effect on October 17, exactly a year from the first round of marijuana legalization. However, sales will not start that day.

“It is expected that a limited selection of products will appear gradually in physical or online stores, and no earlier than mid-December 2019,” Health Canada said.

This soft launch of sorts is being cautioned by the federal government because of the mandated 60 day notice period for new products by cannabis companies. As a result, consumers should not expect a rush of product availability on day one.

As part of the rules from Health Canada, cannabis-infused drinks will face a limit of 10 milliliters of tetrahydrocannabinol (THC) per package. Items will need to display the amount they contain visibly and will require an equivalent to grams of dried flower for consumers to compare.

When it comes to restrictions on stock keeping units (SKUs), the government will allow multi-packs of the same product, so long as the total amount of THC in the complete package does not exceed 10 milligrams.

Retailers will need to prepare for the launch of this market and place orders on the SKUs available.

Despite the entry of alcohol makers and their participation in the development of these marijuana beverages, the federal government has made it clear it will not tolerate any branding associated with existing alcohol brands.

“(It’s) crazy to me that an alcohol company can advertise in the supermarket and advertise online and advertise on bus shelters and have the most beautiful packaging in the world and a cannabis company can have none of that,” David Pullara, chief marketing officer of Hill Street Beverage (TSXV:BEER), told INN.

While edible items will initially attract significant attention, the pressure for beverages to deliver the goods for public firms and investors is mounting.

Different form factors will offer option to differentiate cannabis drinks at first

One of the key differentiating factors for the first batch of competing cannabis drinks will be onset and offset times. This is the amount of time it takes for the high from the drink to kick in and leave the system of its consumer.

Cole Miller, cannabis research director at Iconic Brewing, told INN that there will be a range of onset and offset times for the first few beverages available.

But eventually, in about five to 10 years, he said that this will become standardized in a similar way to the alcohol market today.

According to Pullara, another beverage maker, every company in the cannabis-infused drink market is racing towards delivering efficacy and a standardized product that consumers can develop a trust relationship with.

“Nobody is going to want to take a beverage and not feel it for an hour or two hours and then completely feel it all at once … I think that companies that can’t get their onset and duration right are going to be at a huge disadvantage right from the start,” Pullara said.

Kris Dahl, vice president of corporate development for Sproutly Canada (CSE:SPR,OTCQB:SRUTF), previously told INN that consumers who have previously tried cannabis drinks have suffered from poor technology leading to bad experiences.

“Some people are impatient looking for that effect, so they drink too much, and when it finally hits, they are out of it for a long, long time,” Dahl told INN.

Besides the form factor of delivery times, there has also been support for these drinks being a healthier recreational item compared to alcoholic drinks.

“If I have a choice to hang out with stoned people all night or drunk people, give me stoned people all night all the time,” Bruce Linton, former co-CEO of Canopy Growth (TSX:WEED,NYSE:CGC), told Bloomberg.

Marketing restrictions create critical relationship between budtender and consumers

Health Canada has taken a stiff stance on the marketing and product design for cannabis products, and that has led to some frustration in the sector. Beverages will see similar packaging restrictions and guidelines.

John Kaye, CEO of British Columbia-based marijuana accessory and clothing retailer Burb, said stores will rely on a lot of education and information to sell these drink products. Burb plans to become a licensed marijuana retailer.

Due to the no self-serving restrictions on cannabis products, consumers will not be able to pick up a bottle or a can of a cannabis drink from a shelf or fridge inside a legal store, as they would with other beverages, said Miller. Instead, they will ask the budtenders and associates at a store directly.

“The only way we’re going to reach that consumer is through that budtender right now, because we can’t market,” Miller told INN. His firm sells a variety of novelty alcoholic drinks and will offer cannabis-infused drinks.

Miller explained that cannabis beverage makers will have to work in partnership with budtenders to guarantee word of mouth buzz is created for these drinks.

When asked if any marketing restriction changes could be on the horizon for these drinks from Health Canada, Miller said change occurs when consumers demand it, not when stakeholders ask for it.

“I’m not overtly against having (cannabis-infused drinks) behind the shelves because you have to interact with that budtender and it’s a great point for knowledge and information to get passed along and get that right product for the right person,” Miller told INN.

Investor takeaway

While marijuana drinks are creating a buzz in investment, stakeholders will still have to see the development of the subsector, as the roll out of these products will take time.

“Nobody really knows what’s going to happen and that’s one of the exciting things about this new format, the edible and consumable beverages coming into the market,” Johnson told INN.

Part two of our feature on cannabis-infused beverages will discuss the deals struck between public marijuana firms and established beverage makers, as well as more about the projections this market is attracting.

This article was originally published by the Investing News Network in July 2019.

Don’t forget to follow us @INN_Cannabis for real-time news updates!

Securities Disclosure: I, Bryan Mc Govern, hold no direct investment interest in any company mentioned in this article.

Editorial Disclosure: Hill Street Beverage is a client of the Investing News Network. This article is not paid-for content.

The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.