The rise of CBD and hemp-infused beverages continues to be one of the major industry trends of the year. It’s being fueled by innovative brands, novel concepts and retailers seeking a piece of a market estimated to reach $260 million by 2022, according to Canaccord Genuity.
The role distributors will play in driving the success of this emerging market, however, shouldn’t be underestimated. Having watched Los Angeles-area retailer interest in CBD and hemp-derived products rise over recent years, LA Distributing Company (LAD) is one the independent DSD wholesalers across the country seeking to establish their bonafides working within the category, even as the legal framework around such products remains in flux.
“It’s interesting because some accounts are more bullish than others and some accounts have received letters from the California Department of Health and have decided to hold off until further notice,” LAD co-founder Richard Medina told BevNET last week, talking about CBD- and hemp-infused drinks. “Accounts that know there is a huge demand and have a positive outlook on how some of the regulation is going to change over the next few months, they take our brands and sell them hand over fist. It’s absolutely amazing for this new category but also a little scary because every single brand is just starting to have a line extension adding CBD.”
Over the past several years, California has been heavily involved in the national debate over the legal sale of CBD and hemp products. Last summer, the California Department of Public Health (CDPH) issued a revised FAQ prohibiting the use of CBD derived from industrial hemp in food and beverage products, which in turn brought a response from CBD industry leaders in the state. While state health officials sort out regulations, LAD’s approach has been to offer customers a balance of CBD and hemp-infused products, which currently includes SKUs from VYBES, Sol-ti, Honeydrop and Hemp2O. VYBES, Sol-ti and Honeydrop each feature “CBD” on their packaging, while Hemp2O does not. LAD also carried hemp extract shot Hemplify until recently.
In addition to providing a pathway into different channels — VYBES sells at a limited number of influential independent accounts, while Hemp2O is aimed at chain retail partners like Kroger and Safeway — having both CBD and hemp products balances some of the risk until further clarity arrives. As Medina noted, any changes to state or federal law could change the entire dynamic of LAD’s business.
“I think CBD is going to lead the pack, but it’s going to take time,” he said. “Other [retailers] may want hemp in the meantime until they feel comfortable that CBD is permitted. I don’t want to push them too hard — I want to provide them with options so they can make a decision that they are comfortable with.”
However, Medina voiced some concern that the proliferation of products entering the market across all categories, and specifically those introduced as value-added line extensions, could dilute the CBD/hemp market just as it is beginning to emerge.
“Right now, it’s about looking for a brand that is built around CBD and that wants to be the CBD brand,” he said. “What we’ve been seeing is a lot of brands that have been built in a different category and are launching CBD line extensions. We really want to see a brand that is focusing on CBD — everything about it is CBD and they aren’t venturing away from that.”
Outside of hemp and CBD, Medina said LAD is making building a portfolio of plant-based products a main priority; for beverages, that means non-dairy milk alternatives from Elmhurst, which, he said, he prefers to category leader Oatly because of its cleaner ingredient panel. He also noted that the cyclical nature of the ready-to-drink coffee market means that retailers are beginning to ask for more shelf-stable options as the refrigerated shelf has become more crowded. LAD currently offers cold-chain products from Chameleon, Groundwork, Stumptown, Lucky Jack, Grass Fed Coffee, Taste Nirvana and Humblemaker.
“Retailers will still take refrigerated product — they know the demand is still there for black, unsweetened cold brew — but if you can bring in a shelf-stable product that looks and feels refrigerated and is premium, there is a void in that market,” he said, adding the LAD is in talks with brands like RISE Brewing Co. and Wandering Bear.
While maintaining a progressive edge, Medina noted that LAD is not set up to expand in all areas at once. The company, founded in 2012 when Medina and partner Arthur Flores exited their previous Southern California distribution company, Gourmet Purveyors International, was conceived to compete with regional players like Haralambos by focusing on providing a “one-stop solution” to a fragmented local market. This increases the value (and risk) of making successful bets on brands, according to Medina,
“Our elevator pitch is that we are where UNFI meets Costco,” he said. “We are like UNFI in that everything we have is better-for-you and healthy. We are like Costco because we have a limited SKU selection; we don’t have everything but we have the top performers in every new category.”
That approach puts extra onus on LAD to make the right calls; “If [the product] isn’t moving in two weeks, [retailers] are calling us and asking for something else,” Medina said. To avoid that potential hazard, LAD is launching an incubation program to help brands achieve proof of concept on store shelves. The fund will start somewhere between $10-25 million and will target brands with revenues of $750,000 to $2.5 million per year.
“We’ve been talking over the past year to investors asking ‘What is the next brand? How can we invest?’” Medina said. “The writing was on the wall that we need to start working with investors to broker some of these deals and more importantly start raising money and managing a fund where we can deploy capital based on what we see in our customer base.”
For the moment, CBD and hemp is as good a bet as any for where the beverage industry is going. Yet for LAD, that means finding the companies that “everything about it is CBD and they aren’t venturing away from that,” according to Medina.
“I get calls everyday from people saying they are starting a CBD water — and I say no,” Medina said. “I can just tell these are guys who went to a co-packer, threw some CBD in [water], put on a cheaper label and now it’s a race to the bottom on price — just like any other alkaline water that you may see start now, it’s a race to zero. I think now coming out with a premium [hemp or CBD] product and holding your price to ensure you have integrity on shelf — that’s what we are looking for.”