Are cannabis beverages still the next big thing?
By Matt Maurer and Vlad Mihaescu
By Matt Maurer and Vlad Mihaescu
While many were excited to see topicals, extracts and (food) edibles enter the legal marketplace, the anticipation of cannabis-infused beverages was perhaps second to none amongst new legal cannabis products.
This was due, in part, to the fact that unlike most other classes of cannabis, the legacy market has suffered from the lack of the technology to produce beverage products on a meaningful scale.
Some tout beverages for the potential health benefits of the delivery system over other formats, such as smoking. Others view these beverages as a potential disruptor for the alcohol industry. There are also those who see beverages as a potential means of introducing cannabis products to non-cannabis consumers.
These reasons, either individually or in combination, have led many to tout cannabis beverages as “the next big thing” and an important category in the cannabis market.
Cannabis-infused beverages are classified as “edible cannabis” pursuant to Schedule 4 of the Federal Cannabis Act. They are, therefore, not only subject to the regulations under the Cannabis Act, but also other legislation such as the Food and Drugs Act. There are a number of Cannabis Act rules and regulations that are unique only to the edible class of cannabis. While too lengthy to discuss in this article, we will look at some which, in our view, closely impact the future success or failure of cannabis beverages.
In order to produce cannabis-infused beverages, a producer must obtain a processing or microprocessing licence from Health Canada. This type of licence permits producers to take cannabis in its natural form and process it into various permitted forms such as oils, creams, extracts, concentrates, edibles and beverages.
These licences are site specific and derivative cannabis products can only be created in the producer’s licensed facility. This presents a high barrier of entry for anyone looking to produce beverages, as they must first obtain a licence, which is a long and capital intensive journey.
Moreover, Health Canada requires that cannabis beverages, and edibles in general, must be produced in separate facilities from ones where non-cannabis beverages are made.
This means that for existing facilities where non-cannabis beverages are produced, like water or soda bottling factories, the need for new facilities creates added capital cost.
The onerous and lengthy process of obtaining a licence prohibits traditional beverage makers from quickly adding cannabis-infused beverages to their existing product line. It also creates additional hurdles for American cannabis beverage companies to enter the Canadian market.
As a result, companies with existing knowledge to execute on cannabis-infused beverages cannot, by and large, enter the market quickly. And those with licences already in hand require time to build up their knowledge base, or establish appropriate business partnerships. It is not to be totally unexpected then for there to be a longer runway before consumers find cannabis stores stocked with a wide array of high-quality cannabis-infused beverages.
Packaging and promotion
Uniform packaging that is generally unappealing and the inclusion of prominent warning labels make it difficult for cannabis products to attract the same attention as less regulated substances, such as alcohol.
Any kind of traditional promotion is generally prohibited, unless it is done in a forum where youth are not permitted. Even in such instances, the promotion must not “evoke a positive or negative emotion about or image of, a way of life such as one that includes glamour, recreation, excitement, vitality, risk or daring.” As one would expect, it can be quite difficult to advertise to individuals without connecting on some kind of emotional level.
Many see cannabis beverages in direct competition with alcohol, being a disruptor to this industry. However, the alcohol industry is far less regulated from an advertising perspective, and therefore, has an inherent advantage when it comes to marketing.
From a distribution perspective, alcohol is also much more available to consumers than cannabis, being sold in a variety of locations such as grocery stores, restaurants and bars.
By comparison, cannabis products may only be sold in licensed cannabis stores, where no young persons are permitted to enter.
Regulators have been clear to keep the distinction between the two substances. Cannabis products are not permitted to have an alcohol content level of more than 0.5 per cent. It is prohibited to promote cannabis products in any way that would reasonably associate them with an alcoholic beverage. For example, packaging a cannabis beverage in a beer bottle would be prohibited, as would labelling the beverage with words like “beer,” “ale,” “pilsner,” etc.
The Cannabis Act imposes a 30-gram purchase or possession limit of cannabis, and equivocates 70mL of non-solids containing cannabis to one gram of actual cannabis, regardless of what the actual THC or CBD concentration in the beverage is.
This means that given the standard 355mL size of beverages typically sold, consumers cannot purchase more than five beverages per visit to their cannabis retail store or online. This can make the purchase of cannabis beverages limiting and tedious if one is intending to purchase medium to larger quantities and makes purchasing cannabis-infused beverages for gatherings or entertaining essentially impossible to do, certainly not with the same ease that can be done with the purchase of alcohol.
Trends to date
Due to decreased investment in the cannabis sector and the restrictions brought upon by the pandemic, many licensed producers have been occupied with downsizing and liquidations, and have not had as much opportunity to innovate new products.
Much like the overall market, cannabis-infused beverages are still in their infancy. With only a year of public availability, we expect this category to grow not only in the number of brands available, but also in the innovation of new products and improved quality and consistency.
Althouh cannabis beverages have some regulatory challenges that are potentially holding them back from taking off, there is some great potential that exists for players with a strong product and creative marketing. Some industry participants have taken a wait-and-see approach, but it is clear that the beverage category brings a diversity of new offerings to a market that some see as being highly commoditized.
Cheers to the exciting opportunities ahead.
Matt Maurer is a partner and co-chair of the Cannabis Law Group at Torkin Manes LLP in Toronto.
Vlad Mihaescu is an associate in Torkin Manes LLP’s Business Law and Cannabis Law Groups.