For anyone who wants to drink their cannabis, 2021 has been a good year. Consumers can now choose between THC-infused beverages in cans, bottles, powders and tea bags. Hot chocolate and kombucha options are on the table.
The reason for this surfeit of choice is that drinks were, at one point in time, expected to be the future of cannabis. A 2018 Deloitte survey, for example, estimated that the annual Canadian market for cannabis beverages could be worth $529-million. One in three likely cannabis consumers said they were eager to try them.
But despite the industry’s enthusiasm, sales of the beverages have lagged expectations, leading some observers to say that the category’s potential was exaggerated. Canadian consumers have been deterred by high prices and legislated limits on the potency of the products. Analysts and cannabis companies, meanwhile, remain optimistic about the segment’s future, saying product development and regulation are slowing its expansion.
Whatever their future, the current struggles of cannabis beverages add to the tumultuous story of Canada’s cannabis market, which has seen underwhelming results since legalization.
According to data from the Ontario Cannabis Store, the province’s online retailer and wholesale distributor, cannabis beverage sales between April 1 and June 30 amounted to $4.8-million, or 2 per cent of Ontario’s total cannabis market during that time. During the same period in 2020, Ontario beverage sales totalled $1.5-million, or 1.2 per cent.
Frederico Gomes, a cannabis analyst at ATB Capital Markets, estimates that the total Canadian wholesale market for cannabis beverages in 2021 could amount to $60-million, or close to $100-million at retail. But he noted that the totals could be larger than his estimate, given the rapid expansion of the market.
“Obviously, the market did not grow as expected,” Mr. Gomes said. “You had these large companies investing in the space, and they invested because they saw some potential. But you’re talking about manufacturing technology – you need volume to make that profitable, and that’s not there yet.”
Beginning in 2017, beverage companies poured into the Canadian cannabis sector, making huge investments to prepare for the development of a new drinks industry.
In 2017, beer and wine distributor Constellation Brands bought a $245-million stake in Canopy Growth – the start of a series of investments that now total more than $5-billion. The following year, Hexo Corp. and brewer Molson Coors Canada partnered to create Truss Beverages. The two companies have since contributed over $100-million to the venture.
In 2019, Budweiser owner Anheuser-Busch InBev partnered with Tilray on Fluent Beverages, a $100-million joint venture aimed at developing cannabis drinks. Later that year, cannabis producer Valens GroWorks Corp. acquired beverage company Pommies Cider Co. for $7.5-million and said it would dedicate a further $10-million to facility upgrades.
There is data that suggests cannabis beverages are heading toward an upswing. According to Headset, a cannabis research firm based in Seattle, growth of cannabis beverage sales in Canada is expected to outpace the growth of the total cannabis market. Beverage sales nationally grew by 27 per cent in the second quarter of 2021, and another 34 per cent in the third quarter. This compares with total cannabis market growth of 12 per cent and 13 per cent for the same quarters.
Hexo, one of only a few cannabis companies that separately reports its drink revenue, says its products account for 50 per cent of cannabis beverage sales in Canada. It reported total fourth-quarter net revenue of around $5.1-million from the sale of beverages to provincial distributors, up 70 per cent from the previous quarter.
Other companies have avoided the drinks category. Mandesh Dosanjh, president of B.C.-based licensed cannabis producer Pure Sunfarms, said that although he was initially interested in beverages, further research into production costs, regulations and demand dissuaded him.
“Given the headwinds that I see in beverages, there’s no point for us to move into it. There’s no money to be made there,” he said. “I think a lot of other people are trying to create demand that just doesn’t exist. They’re trying to push a rock up a hill.”
He said he would reconsider if cannabis beverages started to be sold alongside alcohol in government-run liquor stores – although at the moment there are no plans for that to happen. As for the slew of new product announcements in the space, Mr. Dosanjh said big players are locked into their plans after “overhyping” the possibilities of the beverage market.
“They’ve got themselves in a pickle now, where they put all their eggs in the basket of beverages. The only other alternative they have is to start shutting down and retracting, and I think their ego stands in the way of making any pivots,” he said.
Recently, Hexo announced it was closing down two facilities and laying off 155 employees, just weeks after the company’s auditors raised concerns about overwhelming debt payments.
“At the beginning, it was about who could spread the fastest and cover the most real estate,” said Lucas C. McCann, chief scientific officer at Toronto cannabis consultancy CannDelta Inc.
“Now, that’s shifting. We’re seeing companies centralizing their operations, selling facilities at a fraction of the price, and cutting jobs. They’re focusing much more on quality instead of world domination,” he said.
Where beverages are concerned, improving quality has meant advancing the science of the drinks themselves. In 2019, U.S.-based Lagunitas Brewing Company revealed that it was having trouble mixing oil-based cannabis ingredients with water. Now, some manufacturers are using “nano-emulsification,” a process that breaks down cannabis particles so they can distribute evenly within a drink.
This process also speeds up the onset of psychological effects, Mr. McCann said. Users of the most potent cannabis beverages can expect the effects to peak around 10 minutes after consumption, whereas other edibles can take as long as two hours to kick in.
Mr. McCann said the industry was betting on approval for cannabis lounges – bar-like spaces where people could use cannabis products in public – to help introduce both new and experienced cannabis users to beverage products, but the pandemic halted progress.
“It’s not going happen any time soon. Until we see the opening of consumption lounges, I don’t expect that beverage sales are going to change too much.”
Others say that regulation is to blame for slow sales. Toronto cannabis lawyer Harrison Jordan said possession limits, as well as restrictions on product potency, are suppressing interest in beverages.
Cannabis products, including drinks, are currently capped at a maximum 10 milligrams of THC (cannabis’s active ingredient) a package. This is at the bottom of the range of what a habitual user would consume in a sitting, and it’s much more expensive per psychoactive unit than dried flower. In other words, for regular cannabis users, getting high with a drink is much more expensive than smoking.
The OCS charges $10.95 for the Regal Pink Grape Sparkler drink, which contains the maximum 10 milligrams. Cheaper, less potent options are also available. Houseplant’s Lemon Sparkling Water, which contains 2.5 milligrams, sells for $3.95, making it comparable in price to some craft beers.
Analysts say possession limits are an equally vexing problem. Current regulations require retailers to cap total sales to a customer at 30 grams of cannabis per visit. Some drinks, like Canopy Growth’s 355-mililitre formats, count for as many 5.1 grams towards that limit, meaning consumers can only buy five at a time.
Despite the barriers, cannabis producers continue to create new drinks: in early November, Truss launched a beer-style cannabis beverage, and Canopy launched a lemon-lime tonic under its Deep Space brand.
“It’s a very small market in Canada, but obviously growing,” Mr. Gomes said. “I think it has a good chance of becoming a real market, but it’s going to take a while.”
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