Guest post by Marc Solby, founder of Lighthouse Consulting
On the eve of Cannabis 2.0 in Canada, with the addition of edibles and beverages, investors and producers are excited by the potential growth. With the rock star alliances between major brewers and Licensed Producers, the level of investment and the hype you would think that it is a big deal. It’s not.
First let’s consider a critical regulation: The container cannot contain more than 10mg of THC. So, whether it is a wine bottle or a skinny can or a tetra Pak juice box, it has the same kick. Which is to say, not that much.
For perspective, pre-rolls are commonly half a gram (500 mg). If they contain potency of 20% then you are holding a joint with 100mg of THC versus your beverage with one tenth of that. It’s not all perfectly equivalent, and it is a personal choice on how much and how you choose to ingest, but having 10mg of THC has a material impact on what the Producer can charge for the serving. The retail price in Colorado for a 10mg serving is around $CDN 6.50 and of course it is a significant premium to flower.
While drinks may be a premium product and brand power can drive premium pricing (think Lagunitas Hi-Fi Hops Cannabis bev), regulations have shut that door as well. There will be no cross-branding with alcohol brands or breweries.
Now let’s consider the cost side. Nothing creates manufacturing cost like small production runs. These runs will make your local craft brewery look like Budweiser in July. The container will also be non-standard because it needs to have a childproof mechanism. A plain old skinny can won’t cut it. Lastly, the high-quality THC derivative, however it is created, is in the early stages of development and scale. It will not be inexpensive as an “active ingredient”.
Some industry players may claim that the relatively high early-stage costs are a natural part of the growth curve and margins will improve with volume growth. This explanation assumes that there is ample consumer demand for it and cost can be worked out over time. Based on some US market data from Q4 2019 from Headset, the beverage share of the cannabis market is…”a sliver”. That is, too small on the stacked column chart to get a number. Colorado operators that I have spoken to have pegged the beverage share in that long-established market at two percent. Not so fast, niche marketer! The most popular sku’s in Colorado are in 100ml single serve bottles, like the popular Olala cannabis sodas. So, go ahead and factor down the potential Canadian market size to take out any higher-potency offerings.
There are long-tail niche categories that can still succeed with the instant breadth of distribution and convenience that online commerce provides. This may be case for for gummies, oil, tinctures, capsules, flower etc. Bulky, heavy beverages are at a profound shipping disadvantage. Beverages, then, are perhaps best distributed in physical stores and “on-premise” bars or cafés where they can be well-merchandised. Of course, the national bricks and mortar retail infrastructure is still in its first trimester of life.
Ultimately, Canada’s THC beverages are a product that is constrained by regulations, at a cost disadvantage, cannot leverage existing brands, have little natural consumer demand and virtually no distribution opportunities. If you think that’s tough, try doing it with CBD rather than THC.
About the author:
Marc Solby is the founder of Lighthouse Consulting in Toronto and the Cannabis Consumer Update, Canada’s first syndicated study of the cannabis consumer. He has led market research and consulting with the world’s leading beer, wine and spirits companies and is a former Director of Marketing at Labatt Breweries.