Green Rush: The Beverage Business and CBD Part 2

You could see it coming early on a Wednesday morning in March, when dreamers from the food and beverage industry packed a ballroom at the Anaheim Marriott hotel to learn about one of the year’s hottest trends: cannabidiol, more commonly known as CBD.

It was a half-day summit during Natural Products Expo West 2018 — and it was ushering in a part of a trade show for an ingredient long untouched by CPG.

Beyond the oils and pills that make up a sizable chunk of the market for cannabidiol, an increasing number of beverage companies are experimenting with CBD, the non-psychoactive compound that can be derived from hemp and marijuana that is believed to have health and wellness related properties. At Expo West, smaller, previously existing brands such as Buddha Teas and BLK Water showed newly-developed CBD SKUs, while Tree Below Zero showcased an entire product portfolio based around the ingredient.

In the months since Expo, innovation hasn’t slowed. Shot makers like Ablis and California Juice Co, coffee brands like Cuvee and Kickback Cold Brew, and even craft beer brewers have unveiled line extensions or brands built around the functional ingredient.

As recreational marijuana sales continue to open up in states across the country, and with political leaders across the aisle calling for legalized hemp farming and distribution, the market for both CBD and Thetrahydrocannabinol (THC), which produces the psychoactive effects associated with feeling “high,” has exploded. The legal cannabis industry as a whole brought in $9 billion in 2017 — and that’s prior to the launch of recreational sales in California this past January. Hemp-derived CBD is currently legal in 46 states and The Hemp Business Journal has estimated hemp and CBD food, beverage, and cosmetics will grow to a $1.8 billion market by 2020.

Still, despite entrepreneurs’ willingness to experiment, CBD beverages haven’t yet become a wave, and there are plenty of obstacles in the way: production, distribution, branding, and an uncertain regulatory and shipping environment are all drags on what is expected to be a huge business.

Those challenges won’t stop the people are still looking to the future, however.

Getting In Early

For a look at that future, check in with a beverage veteran.

L.A. Libations EVP David Meniane no longer goes a day without taking CBD. Since first deciding to explore the space, he has immersed himself in functional beverage brands building around CBD, sampling hundreds of products over the course of the past year. During that time, Meniane became a true believer in CBD’s physical and mental benefits. With a green light from their investors, The Coca-Cola Company, it’s a question of “when,” not “if,” L.A. Libations will partner with a CBD-based beverage brand.

“The amount of people involved in CBD is higher than anything we’ve ever seen,” Meniane told BevNET in a phone call in March. “Eighteen months ago I don’t think we had even one call from a CBD company. In the last ninety days, I think we spoke to 20 different companies that do different things.”

As entrepreneurs across categories seek to launch brands, beverage developers such as Sovereign Flavors have likewise been seeing a sizable uptick in clients.

Katie Allen, account executive at Sovereign Flavors, told BevNET the company first began getting inquiries for CBD beverages in 2016, but over the past six months the amount of requests has “ramped up.” The majority of these clients, she said, are seeking to develop functional products focused on health and wellness.

But investors, while showing showing a growing interest in CBD beverages, don’t seem to be fully sold on the concept. Most investment activity thus far has been focused on marijuana producers and cultivators rather than beverage-centric businesses, which could see further growth as overall interest in the cannabis market continues to rise.

Up to now, much of that activity has been limited to Canada, where cannabis companies are allowed to be listed on the country’s stock exchange. In late February, Toronto-based Tinley Beverage Company, which produces both THC and CBD-infused drinks, raised $7.9 million in a private-investment-to-public-equity transaction. Meanwhile, liquor conglomerate Constellation Brands’ $191 million investment in Canadian cannabis company Canopy Growth last October was discussed in the media as one of the first major plays from a mainstream corporation in cannabis products.

Kevin McGovern, chairman and CEO of McGovern Capital and co-founder of new age beverage brand SoBe, has invested in several medical cannabis companies around the world including Canada-based WeedMD, Israel Plant Sciences, and INTIVA. McGovern said he sees “the floodgates” about to open for the cannabis market.

Still, he remains cautious of the beverage space for CBD and cannabis products as brands scramble to establish themselves on the ground floor.

“To what extent will this ‘green rush’ be a ‘green avalanche’ similar to Colorado has been [for cannabis]?” McGovern said. “I think there’s a lot of people in the cannabis business in California, but frankly I think there’s other states that are even more opportunistic because there’s less noise going on. There’s a lot of people racing to this ‘green rush’ but many of them really don’t understand the marketing aspects that are necessary for a successful product.”

While the hype is growing, CBD beverages still face a long road ahead. Allen said she’s seen many of her clients struggle to find willing co-packers, while some entrepreneurs have said they’ve been turned away from skittish retailers.

Educating the Consumer (And the Buyer)

Consumer interest in CBD products has been rising for several years. According to data from cannabis review and tracking website Leafly, CBD saw a 521 percent increase in user interest between August 2014 and July 2015, making it one of the most searched terms on the site. With marijuana making leaps toward the mainstream, bringing a built-in consumer culture with it, many people are already aware of CBD’s functional benefits and are looking for an affordable delivery vehicle.

But when Kickback Cold Brew first launched last year, its co-founder and CEO Pierre Real found that the original packaging design made some consumers hesitant to try the drink.

On some “bad advice,” Real said, the label featured marijuana leaves woven throughout the brand name. Although he was still able to get the product onto shelves, there was confusion and hesitation among consumers whether the drink contained THC.

In April, the company rebranded and added cold brew tea SKUs to its portfolio. The new bottle features a more neutral color palette, with a nondescript leaf above the brand name and a large callout to CBD on the front.

“I thought that maybe people would be intrigued if they saw [marijuana leaves],” Real told BevNET. “But now that the new laws have passed I think it’s kind of corny to have a pot leaf on the design. We’re going for a classier look, more subtle.”

Some brands, such as CBD shot maker Ablis, have even taken to highlighting “THC-free” on packaging in order to reassure consumers that the product is non-psychoactive. But in some markets, many are already aware of the distinction.

Cuvee Coffee, which last year launched an RTD line after nearly two decades as an Austin, Texas-based cafe, recently rolled out its own canned version of CBD cold brew coffee. According to founder and CEO Mike McKim, the company held a launch party for the line extension on April 20 after a successful test run in the company’s brick-and-mortar store. During the test, McKim said he was surprised by the number of consumers who were already educated on CBD, and that being in a younger city like Austin has helped. However the company has still had to deal with non-educated consumers who confused the ingredient for marijuana.

While retailers are growing familiar with the category, concerns remain even in states approved for legal medical and recreational cannabis sales. Last year Kickback ran into issues in at least one California county which, prior to the implementation of cannabis legalization in January, could not carry the product due to local regulations. However, Real told BevNET that many independent retailers he approached were excited to carry the product, and the company has since increased its placement throughout Southern California, including in high visibility natural food account Erewhon, and in Backyard Bowls stores. Over the past two months, he recently told BevNET, the brand has doubled its accounts.

Geography remains an obstacle: Cuvee’s CBD coffee has been picked up for sale by Safeway stores in Colorado, McKim said, but not all retailers are completely on board. Markets where recreational marijuana is legal tend to pose little difficulty, he said, but other states — including Cuvee’s native Texas — can be scattershot in buyer approval.

“What we’re finding is some retailers are way more willing to put the product in, others are like ‘nope, we’re not gonna touch it with a ten-foot pole,’” McKim said. “There’s a handful of retailers that never lead the way, they always follow. They wait for other retailer to lead the way and when the models prove successful then they adopt it. Those are the ones who are just saying no.”

Even among lawyers and experts, there is confusion over what is and isn’t acceptable. Early into launching Kickback Cold Brew, Real admitted “it was a little scary” talking with lawyers about the potential legal issues he could run into, such as the requirements for sourcing CBD from hemp and the gray area surrounding out-of-state shipments.

“[L.A. Libations is] having meetings with different attorneys almost every couple of weeks,” Meniane said. “What’s been frustrating is different attorneys give you different information. If you talk to a guy who sells California-grown, hemp-derived CBD extract he’s going to tell you it’s perfectly fine, but then you talk to an attorney who’s very risk-averse he’s going to tell you ‘no don’t touch it.’ So, we’re playing a game where we’re getting conflicting information, not in the terms of the efficacy of CBD but in the ability to actually use it in the marketplace in one of our beverages. It’s probably the first time I’ve seen a situation like that.”

Another issue for buyers, Meniane said, is the lack of uniformity in labelling terminology. The difference between hemp oil, which is made from processed hemp seeds, and CBD, which comes from the flower, has created some confusion for consumers and retailers over whether the two ingredients are the same or not.

The Wellness Approach

Vancouver-based brand Phivida, which makes CBD infused teas and vitamin shots, has taken a holistic approach to branding. According to President and CEO John-David Belfontaine, the company views itself as a functional food and natural health products brand, placing an emphasis on the scientifically-backed health benefits of CBD. Using the “hemp oil” labelling on its packages, the brand has targeted natural retailers inn California, Oregon, Washington, and Colorado — all states which have legalized recreational cannabis.

According to Belfontaine, CBD has in part seen a large boon this year due to a number of external factors, including the decision in January by the World Anti-Doping Agency (WADA), to lift its ban on CBD, declaring it is safe and is non-performance enhancing. This move, Belfontaine said, has opened the door for companies like Phivida to produce CBD-related sports drinks targeted at athletes.

“It’s a major, major development for us,” Belfontaine said. “The reason it’s most important is that up until now athletes have had to rely on opioid-based products to treat pain from injuries, leading to all kind of addiction and abuses.”

Phivida is developing a “neuroprotective” athletic line for athletes in hard contact sports like football, which see high brain injury rates. Belfontaine said Phivida’s products contain a “therapeutic dose” of at least 25mg of CBD.

In March, medicinal cannabis producer WeedMD partnered with Phivida to create Cannabis Beverages, Inc. (CanBev). Using WeedMD’s production facilities and cannabis supply, the joint venture will develop cannabis-infused beverages in the Canadian medical market, according to the announcement. But, until cannabis is fully legal on all levels of government in the U.S., CanBev plans to stay within the Canadian border.

Going to the Source

Before a company can begin producing CBD-based products, it needs to find a source. As demand grows, both suppliers and government regulators are responding accordingly, but even with the rise of state-sanctioned hemp farms, quality suppliers who can meet high demand are few and far between.

Four years ago, Section 7606 of the 2014 Farm Bill opened the door for industrial hemp farming in the U.S., allowing for the creation of agricultural pilot programs for independent growers to receive state-certification to produce and sell hemp for private sale. The bill also removed industrial hemp from definition under the Controlled Substances Act and added protection for businesses working within regulation from being targeted by the Department of Justice or Drug Enforcement Agency. Since the bill’s passage, Kentucky has become one of the nation’s largest suppliers of CBD products. As of January, the Kentucky Department of Agriculture announced it had approved 225 applications from growers, covering 12,018 acres of land and an additional 681,000 square feet of greenhouse space.

Michael Christopher, principal owner of 33 Brands Mgmt, has been developing a hemp-based beverage for several years. Initially, Christopher focused on developing a non-psychoactive CBD product with a tonic called Loft. However, after California, Massachusetts, Maine, and Nevada voted to legalize recreational cannabis sales during the 2016 elections, Christopher pivoted and developed Mood33, a THC and CBD-infused sparkling water, which launched in California earlier this month.

According to Christopher, quality supply sources will increase as more states — including New York, California, and Arizona — come online.

“It’s going to be about aligning yourself quickly enough and early enough with the licensed farmers,” Christopher told BevNET.

Sourcing of CBD can also present a significant issue for product development, according to Katie Allen. At Sovereign Flavors, flavorless and odorless CBD isolates are easier to work with while crafting a good-tasting beverages. But isolates can lack the functional benefits of full spectrum CBD, which includes the other cannabinoids found in the plant — including trace amounts of THC. But full spectrum also comes with solubility and flavor issues, bearing a more “plant-like” bitterness, and having higher quality sourcing can ease the development process.

But there is also hope up north, according to Christopher. Canada is a relatively large market for hemp and many U.S. businesses turn to the country for their supply chain, but there can still be “trial and error” involved in finding a quality farm.

“CBD is exploding around the world right now and it’s not necessarily just the U.S., foreign markets are really coming online for this and it’s becoming a global market for CBD in general,” he added.

Problems Still to Come

Just as some retailers and co-packers have been wary of CBD products, so too have some industry veterans and investors. Jim Tonkin, owner of beverage incubator Healthy Brand Builders, told BevNET that at least 20 different entities have approached him with concepts. But while he recognizes the popularity of CBD, the laws and science are not yet in a place where he could feel comfortable working with a brand built around the ingredient.

“The FDA, in their wisdom, could put a halt to this in five seconds,” Tonkin said.

Tonkin was an early investor in hemp-based brand Hemp2O but has since pulled out. He said that in addition to regulatory issues, he also hasn’t yet seen conclusive science on the necessary dosage needed for users to experience the benefits of CBD. Tonkin said he’s seen conflicting reports and would not consider investing in any brand until there is clarity on that issue.

“It’s a beautiful concept,” he said. “But to me, right now, it’s a concept.”

Kevin McGovern, who foresees massive potential for medical cannabis, said CBD is best absorbed by the body through the membrane under the tongue and it remains unclear whether drinking a beverage with CBD will provide the same level of benefit. Being able to provide products with proven benefits will “separate the men from the boys” in the category, he said.

“I think the mentality that will be successful in the CBD and cannabis beverage industry in general will be those who are skilled at guerilla marketing getting into the consumer’s mind to make them a pro consumer, so that they really understand what the issues are and who they should be buying their products from,” McGovern said. “For example, which product claims really have substance, which claims really have clinical support.”

It’s a lament as old as any other functional beverage — and that means, despite the potential, moving forward, CBD-infused drinks will face many of the same challenges that come any time a new beverage category is created.

“The way we look at CBD is similar to the way we look at the entire beverage category,” Meniane said about L.A. Libations’ search for a CBD brand. “So in terms of exceptional products that would mean specifically what is your source for CBD, what is your knowledge of the CBD space, how much CBD can you prove there is … in your product? On top of that we look at packaging, supply chain, flavor profile, pricing architecture, how much you think you can charge for your product, how much differentiation there is in the market. I see a lot of CBD waters and I’m starting to see less and less differentiation, so I think there’s room for someone to come in and differentiate themselves with a product no one has ever seen.”