The Elephant in the Dispensary: Why Cannabis Beverage Isn’t Big Business…Yet

By Narbé Alexandrian, President and CEO, Canopy Rivers Inc.

Over the last 24 months, there has been a lot of buzz around the entry of large alcohol into the cannabis industry. The largest of those deals was Constellation’s US$4B investment in Canopy Growth, with a path to control the company through warrants. Outside of that mega-deal, we’ve seen a number of wine and spirit producers enter the sector, including Heineken, Moosehead, Molson Coors and Breakthru Beverages.

This is surprising, because data indicates the cannabis beverage market may not be as big as we think. According to Canopy Rivers portfolio company Headset, the cannabis beverages represent approximately 5-6% of the U.S. cannabis market. In 2018, U.S. retail alcohol sales totaled US$254B, seven times larger compared to only US$37B of cannabis sales in the same year.

 
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Growth rates for the cannabis and alcohol sectors aren’t very different- New Frontier Data estimated that cannabis sales grew 7% in 2018, while alcohol sales grew at 5%. If cannabis beverages comprise such a small percentage of the total pie, what are all the alcohol industry giants seeing that the data isn’t showing?

What the data fails to show is that the cannabis beverage segment is only in its infancy, predominantly due to a lack of regulatory clarity.

First, there are no quality or safety measures in place, meaning that consumers don’t actually know what is in their drink or how they will feel when they drink it, especially without specific guidance from the FDA dictating what ingredients should be included in a cannabis beverage. A Brightfield Group study in 2018 showed that 40% of cannabis consumers were concerned with healthier experiences, indicating a willingness to pay more for ingredients they understood.

Second, dosage is a major issue. Many drinks on the market have 100mg or 250mg of THC in them. Consumers are looking for a 5-10mg dose, needing to dilute a 250mg THC drink to get the desired effects. In fact, there are some companies who sell a 250mg THC drink with a one-time pop top – which is the alcohol-equivalent of a bottle of whiskey being designed and marketed as a single serving. Looking at the data on consumption, one of the biggest reasons why rejectors and intenders swayed away from cannabis was due to a bad experience with a homemade product where dosage was not controlled.

Third, there is an inherent problem with cannabis retail in the U.S. With a small footprint to work with – usually 1,000-2,000 square feet-- most retailers try to cram as much THC as possible on their shelves. Space is limited, so if a 250mg bottle sells for $15, then there’s no way a retailer will order a pallet of 10mg bottles priced at $5. To the beverage manufacturer, cannabis is one of many ingredients, with a gross margin difference of up to 50% between the 250mg bottle and 10mg bottle.

Let’s revisit the question again: what are all these alcohol giants seeing that the data isn’t showing? Is there an elephant in the room? In our research, it’s a first-mover advantage towards a fully regulated cannabis beverage industry and the solution starts with regulation. If doses are capped at 5-10mg/bottle, we believe consumers will buy in volume, reducing the cost to produce and driving prices down to the current price of a beer. This, combined with infinite flavour profiles and lack of calories, turns cannabis into a huge alcohol industry disruptor – but to get there, requires proper regulation.