Gerry’s Insights: Delta 9 Consumption Makes for Strange Bedfellows

“We’re allergic to the word ‘disrupt,’” Happy Coffee founder Craig Dubitsky said at the Beverage Forum conference this past spring. “The companies that use the word disrupt are usually the ones being disrupted.” Dubitsky, a successfully exited entrepreneur, likely is right, when you think about it. These days executives at big CPG companies will claim to be agents of disruption even when they foray nothing more than a modest line extension to one of their mainstay brands. One might even question the premise that you can intentionally set about disrupting a category in which you are among the established leaders yourself.

After all, truly disruptive moves are those where the consequences are likely to be heavily, or even mainly, or entirely, unforeseen, unintended, uncontrollable. Which would seem to be a good explanation for why, their heroic rhetoric notwithstanding, the suits at major corporations really don’t have it in them to perform truly disruptive acts. After all, how do you calculate the ROI on blowing up stuff?

Which brings us to hemp-derived Delta-9 beverages. Backdoored into the market by sloppily written cannabis regulations, these are psychoactive drinks that are truly bringing legal THC to the masses – at least for now. In contrast to THC products that are licensed for the narrow dispensary channel in cannabis-friendly states, low-dosage Delta-9 drinks have been proliferating among grocers, bars, restaurants and wine & spirits stores in a way that seemed unthinkable, particularly as progress in decriminalizing cannabis has essentially ground to a halt. Ground zero, a couple of years ago, was Minnesota, as you probably heard at the time. This new category was embraced by craft brewers and beer distributors who needed a lucrative revenue growth engine as well as all classes of retailers, both on- and off-premise. This at a time, remember, that even non-psychoactive CBD beverages remain persona non grata at the major chains because of the vagaries of regulation. Visitors to the Land of Ten Thousand Lakes reported that it wasn’t uncommon to be handed a drink menu that included separate sections for beer, wine, cocktails and D9 beverages. Though the regional news media seemed to be on the lookout for signs of societal breakdown, there don’t seem to have been many, at least not as measured in things like emergency room visits. (Whether underage users are skipping out on their homework is harder to track.)

So essentially out of the blue, a whole new class of intoxicants suddenly found its way into the daily or weekly routines of the broad population and left regulators at the state level scrambling to deal. Now, that seems to bring us closer to something that could be called disruption. As often happens with disruptive developments, it’s roiling the priorities of various interest groups involved in alcohol, distribution and other related areas.

That was clear at the time I was writing this column, when California Governor Gavin Newsom had just moved to take “emergency” action to ban all intoxicating hemp-derived cannabinoids, including THC, in any food, beverage or dietary supplement. This in a market where major alcohol retailers like Total Wine and BevMo had gone all in on the new class of beverage. The move itself was mildly surprising, particularly in the absence of any definitive evidence that the drinks have been causing a health or safety issue. More interesting, to me, were the reactions that the move elicited.

The Beer Institute, which represents the major brewers, commended the governor “for his leadership in closing an unintended loophole that has enabled the proliferation of unregulated intoxicating hemp products. Intoxicating hemp products are being sold as food and beverages, despite not being deemed safe for the U.S. food supply by federal regulators, and in some cases without age restrictions.” The BI’s position aligns not just with California regulators, but with a bipartisan coalition of 21 state attorney generals, who wrote a letter earlier this year that urged Congress to address “this reckless policy.” So the big brewers are aiming to hinder a new class of drinks that can be viewed as competing for the same social occasions. No surprise there, I suppose.

Yet many beer wholesalers – particularly Budweiser houses that have seen their Bud Light sales tank even as categories like hard seltzer and craft beer are flattening out and energy drinks like Bang, Celsius and C4 have fled to soft drink systems – have been embracing the new format. So that’s one area where the brewers are not aligned with their distributor partners. Yet, the distributors’ own lobbying organization, the National Beer Wholesalers’ Association, has likewise been exceedingly wary of the new drinks, which it won’t allow as exhibitors at its big trade show. The NBWA views them not just as a risk to wholesalers’ alcohol licenses, but as generally a bad look for a group of businesses that have long made the argument that the three-tier system is essential to insuring that alcoholic beverages are marketed responsibly. Embracing a largely unregulated (and potentially competitive) intoxicating category’s risks certainly could be viewed as undermining all that. One might think, then, that the trade group for the other big class of alcohol distributors, the Wine & Spirits Wholesalers’ Association, would take a similar view.

But that’s emphatically not the case: they are embracing D9 beverages.

Interestingly, the cannabis dispensary channel also is vehemently opposed to D9 beverages, which impinge on their sanctioned monopoly of legal THC. It’s hard not to sympathize with their point of view. After all, they invested heavily to participate in a channel and already have been frustrated at regulators’ lackluster efforts to shut down the unlicensed black market. All of a sudden, there is a whole new class of seemingly legitimate THC rivals with no testing requirements, no age-gating, no retail restrictions. It all reminds this New Yorker of the quandary our local taxi drivers found themselves in after investing as much as $1.2 million to obtain a medallion conferring the right to operate, only to suddenly see tens of thousands of Uber and Lyft drivers on the street competing for the same fares without any meaningful entry barrier. There has been a spate of suicides from desperate medallion owners who lost hope of ever recovering that massive investment. An unfortunate cost of a disruption that’s enhanced the ease of getting around the city, shrug some rideshare proponents.

For their part, D9 proponents say the dispensary clan is welcome to maintain its monopoly in higher-dosage products but that low-dosage drinks yearn to breathe free. And the Cannabis Beverage Association is strongly in favor of installing a regulatory regime of testing, age-gating and other rules that would weed out bad actors. (Pun intended.) So it’s an exceedingly complicated mix of warring incentives and motivations. Where it all ends up, I certainly can’t predict. Few of my contacts in the space will venture a firm opinion either. But that, after all, is the meaning of disruption.

Longtime beverage-watcher Gerry Khermouch is executive editor of Beverage Business Insights, a twice-weekly e-newsletter covering the nonalcoholic beverage sector.