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Monday, Feb 26, 2024
Mugglehead Magazine
Alternative investment news based in Vancouver, B.C.


CBD Beverages Poised to be a Billion Dollar Industry

CBD-based drinks have experienced a surge in popularity over the last year, and are expected to exceed $1.4 billion in the U.S. in 2023, according to Zenith Global.

While the demand for CBD products is exploding in the U.S. and Canada, experts in the cannabis world expect the highly-vaunted wellness extract is about to make a big splash in the beverage industry, once regulations ease in both countries.

CBD is being touted as a cure-all extract to treat anxiety, joint pain and insomnia. And despite limited research to date, CBD-based drinks have experienced a surge in popularity over the last year, and are expected to exceed $1.4 billion in the U.S. in 2023, according to Zenith Global. That’s a sharp rise from $89 million in 2018.

“I can’t imagine any major beverage manufacturer does not yet have a CBD strategy,” said Paul Rosen, a prominent cannabis entrepreneur. “They most likely certainly all do—I think it’s going to be multi-billion dollar industry around CBD.”

CBD, or cannabidiol, is a compound that can be extracted from cannabis or hemp, but it doesn’t get you high like its cousin THC. And Rosen, Managing Director of Breakwater Venture Capital, a private VC fund that invests in the cannabis industry, said because of CBD’s perceived health benefits, and the decline in beer and pop sales, beverages infused with CBD are poised to take off since they meet consumer’s demand for a healthy alternative beverage.

“I think there will be a demand for the beverage products because beverages are so intimately wound into the consumer culture,” he said. “We’re all familiar with having an after dinner drink, a glass of wine with dinner, it’s so much apart of our culture.”

The potential billion dollar market for CBD drinks has attracted the beverage industry and Rosen points out the growing list of joint ventures between Canadian licensed cannabis producers and large beverage companies. Here are a few Rosen says to keep an eye out for:

  • Constellation Brands (NYSE: STZ), makers of Corona and Modelo beer, invested $4 billion in Canopy Growth Corporation (TSX: WEED, NYSE: CGC) last year. It now has a 38 per cent stake in the company.
  • Molson Coors Brewing Co., a subsidiary of beer maker Molson Coors Brewing Co. (NYSE: TAP, TAP.A), has joined forces with another Canadian cannabis company HEXO Corp. (NYSE: HEXO) (TSX: HEXO). Molson maintains a 57.5% controlling interest in the cannabis joint venture, called Truss.
  • Anheuser-Busch InBev (ABI.BR), the world’s largest brewer, and Canadian pot producer Tilray Inc (TLRY.O) have teamed up in a $100 million joint venture
  • Coffee retailer Second Cup Coffee Co. (TSX: SCU) has established a joint venture with National Access Cannabis Corp. (META.V)
  • Sproutly Canada, Inc. (CSE: SPR) (OTCQB: SRUTF) (FSE: 38G), and OCC Holdings Ltd., an affiliate of Moosehead Breweries Limited have also teamed up.

Industry awaits regulator’s decisions

But before consumers can expect CBD-infused beverages on store shelves and the market to take off, industry experts are warning there may be some bumps on the road ahead.

“The market is all abuzz with the potential of CBD,” said Jason Zandberg, a cannabis analyst at PI Financial. “But it’s not a straight line to get there.”

Zandberg said the cannabis industry is carefully awaiting regulations to be put in place for CBD food products in both the U.S. Food and Drug Administration (FDA) and from Health Canada north of the border.

“There’s a whole myriad of regulations that need to fall in line before the CBD beverage market will be a massive market—I think it will get there, but I don’t see it happening this year or possibly next year either,” he said.

After the U.S. passed the farm bill in December of last year making industrial hemp legal, there was an expectation that CBD would be in everything, Zandberg said.

But the FDA is currently assessing “safety, manufacturing, product quality, marketing, labelling, and sale” issues of products containing hemp-derived cannabinoids such as CBD. The agency is holding a public hearing on May 31.

Zandberg was cautious to say when CBD could be allowed in drinks, but noted that the outgoing commissioner of the FDA said it may take two or three years yet.

Meanwhile, in Canada regulations are being ironed out with Health Canada for edibles, including CBD-infused drinks, and are expected to launch in October this year.

Because CBD has no psychoactive qualities like THC and can be derived from both hemp and cannabis, the industry is critical why Canadian regulators are taking such a cautious, heavy-handed approach to the compound.

“We still don’t understand why we are treating this plant and CBD as if it’s plutonium while we are trying to process it and go through the regulations,” said Ivan Ross Vrana, a cannabis adviser at Hill+Knowlton Strategies.

Vrana, who was a policy director on medical cannabis for four years with Health Canada, admits there needs to be more medical research on CBD but expects it will be eventually treated as a vitamin supplement. He added he understands why Health Canada is cautious to avoid negative headlines of any health hazards from cannabis now that it’s legal, but he still wants to see the legal industry thrive.

“What I hope for the future is that we continue to learn lessons and that policies adapt so the industry can flourish and that regulatory burden isn’t so heavy that crushes it, but we find a balance between safety and industry growth, which I think is necessary,” Vrana said.

Vrana added because of the regulatory hoops to jump through, most of the industry won’t be ready to have products on store shelves in Canada until 2020.

Bottled water company seizing CBD opportunity

As regulations continue to get ironed out, Vrana said CBD has a huge potential with bottle water companies who are carefully looking at how to incorporate the extract into product lines.

One of those companies taking early advantage of the burgeoning CBD market and may have an unique position to do so is The Alkaline Water Co. Inc. (TSX.V:WTER, NASDAQ:WTER).

After going public six years ago, WTER rose from obscurity to find success in the heavily competitive bottle water industry that is mostly dominated by Nestlé, PepsiCo, and Coca-Cola.

WTER’s chairman Aaron Keay said the company’s specialized Alkaline88® brand offers a healthier, mineral-rich water that has attracted healthy-minded consumers across the U.S.

“We’ve never spent one single nickel on marketing advertising yet. We have a great product and great sales team and distribution. And we’ve trademarked the word alkaline in our brand and no one else can use it,” Keay said.

Keay added 39 of the top 50 largest grocery chains carry Alkaline88® bottled water, including Kroger, Safeway, Whole Foods, and Walmart. Keay expects the new A88 Enhanced Beverage Division and the addition of CBD-enhanced water will help the company grow to new heights.

“Once we see the general public taking CBD on a daily basis and advocating for it, we all know what’s going to happen to the brands in that sector,” Keay said.

Last year, Coca-Cola was rumoured to be adding a CBD line of beverages, but have since backed out because of the murky regulatory status of the extract.

Because WTER is a smaller company, Keay said, they are more nimble and quicker to the draw to enter the CBD market space.

“First thing out the gate, who is going to catch us? Who else is doing this that is also a household brand?” Keay asks with a confident smile.

For Keay not only the rich distribution system that WTER enjoys will give the company a leg up, but the company can expand anywhere instantly throughout the U.S. with its seven co-packing contracts already in place.

Another advantage, Keay said, will separate WTER’s new hemp-based water products is the high level of consumer crossover from those pursuing their premium water lifestyle products already with its established brand recognition.

Critics of hemp-based beverages often decry the taste of the products, but that’s not a problem for WTER, Keay added. He said the company teamed up with The Ungerer Company who possess the ability to produce 100 per cent natural and organic flavorings.

“The flavor aspect of this business is going to be big. A lot of companies are struggling with the taste of their hemp-based beverage products—but wait until you taste ours,” Keay said.

Keay said WTER is like most of the other CBD-infused beverage companies who are awaiting the FDA’s decisions to expand the company’s stakes in the CBD space, but remains positive it will work out in the end.

Disclosure: The Alkaline Water Company is an advertiser and the directors of Mugglehead own shares.

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