Despite a delayed launch, Canopy Growth's cannabis beverages are gaining momentum in Canada.
After hitting the Canadian market in March, the company now has the No. 1 dollar share in beverages, accounting for about 75% of all ready-to-drink cannabis beverages sold year-to-date in the country. Canopy's Global Head of Beverages Andrew Rapsey said in an interview that since launching, Canopy has sold more than 1.5 million cans of its THC-infused ready-to-drink beverages. According to BDS data in 2019, the entire U.S. THC drink market was only about four million cans.
"The fact that in such a short amount of time, we've actually been able to capture nearly half of that market in Canada, which is a substantially smaller market than the U.S., is very exciting for us and certainly we are full steam ahead on our beverage portfolio. I'm very encouraged by the results to date," he said.
In Canada, cannabis-infused edibles and beverages were allowed to start hitting shelves in December. Before that, Rapsey said cannabis-infused beverages had never been produced for the Canadian market, so there were challenges from a manufacturing and regulatory perspective. Canopy was originally planning to launch beverages in January, but production took longer than expected.
"We were actually able to build an entire production facility in less than a year, moved our production processes from lab scale to commercial scale within a period of a few months," Rapsey said. "And so that explains some of the initial delay between when we announced and when we launched in March 2020."
Rapsey said Canopy's goal in Canada is to dominate with well over 50% of the market two to three years from now. As it scales its operation in Canada, Canopy also has its eye on the U.S.
"We definitely intend to launch beverages in the U.S. in the near future," Rapsey said, but declined to give further detail about when exactly that may be. "We're very bullish on the drinks category, not only in Canada, but the U.S. I think we feel like we've found a proposition and a way forward that will grow our brands as well as grow the category."
Hitting shelves during a pandemic
The pandemic caused lockdowns and quarantines, where consumers were pushed to stay inside as much as possible, which accelerated the demand for e-commerce. Many of the big food giants, like PepsiCo, Mondelez and Unilever, have deployed direct-to-consumer shipping during this time and Canopy also saw a pivot in online shopping interest.
"Launching a brand new category in the middle of a global pandemic comes with its own unique set of challenges," Rapsey said.
Through the first year of marijuana legalization in Canada, Rapsey said Canopy learned that many purchase decisions were being made in-store, especially with new product formats. But when the pandemic hit, Rapsey said Canopy had to temporarily close its corporately owned brick-and-mortar retail stores.
"We're very bullish on the drinks category, not only in Canada, but the U.S. I think we feel like we've found a proposition and a way forward that will grow our brands as well as grow the category."
Global Head of Beverages, Canopy Growth
"So certainly that was a little bit of a hiccup. We're launching a new category, new to the world, and the biggest distribution channel, which is physical retail, we had to close," Rapsey said. "On the flip side, what we saw is as the pandemic was hitting and lockdown was occurring, we saw a huge uptick in sales of cannabis products at the beginning of lockdown as people started stocking up and looking for alternative ways to consume cannabis beyond just like smoking and vaping. So we saw an uptick in online shopping to offset some of the disruption that we had by closing some of our stores. It was a little bit of a push, pull, give and take."
The U.S. also saw an uptick in sales in the legal U.S. cannabis market when quarantines began. Rapsey said that in Canada, the industry was just starting to figure out that physical retail was the place where brands are built, but some people have shifted their shopping behavior.
"As stores have reopened, certainly people are going back to physical retail, but it seems like our [e-commerce] momentum has stayed; it hasn't dipped. So I certainly think that [e-commerce] is a future growth channel for this category," he said.
Getting a head start
Initially, Rapsey said Canopy was the only RTD drink manufacturer in Canada, but others have since joined the market, like THC Kiss. When it comes to competition though, he said that at the end of the day, consumers are going to respond to the products and tastes they like.
Tweed, its RTD carbonated beverage line infused with 2mg of THC, is the No. 1 beverage brand in Canada over the last 26 weeks, he said. All the consumer research around its Tweed Houndstooth & Soda suggests that over 70% of people who tried the product would buy it again, Rapsey added. Houseplant, its RTD sparkling water line with 2.5mg THC, as well as Deep Space, a RTD flavored beverage with 10mg of THC, have also gained momentum, but launched after Tweed, Rapsey said.
Rapsey said the Tweed and Houseplant lines are often less intimidating for consumers who may be new to the market. However, Deep Space, which is geared more toward experienced users and has the maximum amount of THC allowed in Canada, is "really disrupting the category and we're certainly very bullish on that brand as well."
"Obviously timing has a little bit to do with it, but again I think it at the end of the day ... the brands that do well long term will be the brands that deliver on consumers' expectations," Rapsey said. "We've seen overwhelmingly positive feedback so I would say, yes, we're first, which is why we're out to a great lead right now. But what we look for more than just market share is how consumers are responding and how consumers are reacting post-trial."
Rapsey said Canopy's first foray into CBD beverages with a lineup of sparkling waters will launch in Canada in the next month or so.
"We're very excited for our next 12 months because I think there's going to be a lot of great new product innovation and more news from Canopy in terms of our possible U.S. expansion plans," Rapsey said.
The THC beverage market is not brand new to the world. In the U.S. market, it's hovered around 2% of the category. Rapsey said the reason for that is because THC beverages in the U.S. are geared toward more experienced users, with over 50mgs of THC in beverages. California-based brand Cannabis Quencher, for example, offers a CBD Mango with 50mg of THC and 50mg of CBD, as well as a line of lemonade drinks with 100mg of THC. He said Canopy felt that by going much lower in dosage it would improve the taste and appeal to more consumers.
The suggested dosage for low-tolerance consumers is usually 10mgs and new users should consider starting with just 5mgs, according to the Marijuana Policy Project.
"By going lower dosage, lower calorie, better tasting, we're able to actually grow the category and appeal to users who are interested in cannabis, but reluctant to do some of the traditional formats like smoking and vaping. And so that hypothesis has proven to be true so far in Canada," Rapsey said.
David Hammond, a public health professor at University of Waterloo who researches cannabis, said in Canada the maximum dosage in any food or drink is 10mg, which is not the case in any of the U.S. states where it is legal. He explained that THC and CBD are the two most common cannabinoids and the difference is that THC can get you high.
"The idea was just to try and avoid the accidental over-ingestion, which is very common with edibles," Hammond said.
Compared to alcohol, Hammond said the overall health effects are far greater for alcohol than cannabis in terms of economic and direct health effects. Many do suggest there are even positive effects with therapeutic and medicinal benefits to certain cannabis products, which can be the case for some, "but in many cases those are just overblown sort of marketing claims with little substance."
For beverages specifically, he said the extent that drinks avoid exposure to chemicals and smoke is a positive, but the challenge with edibles and beverages is that people have a lot of trouble dosing because it can take more time for consumers to feel it, which is why Canada set a dosage limit. There are commercial benefits to that for companies because instead of selling one super potent product to someone for $10, you can sell three less potent ones for $10 each with the same amount of cannabis, he said.
Hammond said beverages are a small component of the overall cannabis market, but he wouldn’t be surprised if it grows.
"The industry is just starting to explore," Hammond said. "For better or for worse, it has the potential to target non-traditional consumers who might want to transition over from an alcohol product."
A Constellation takeover
Constellation Brands made a big bet on Canopy and now the alcohol giant is very involved in its business. In 2018, Constellation expanded its investment in Canopy Growth to a whopping 38%, spending about $4 billion on the world's largest publicly traded cannabis company. The company increased its investment again last year to 39%.
When Canada legalized recreational marijuana nationwide at the end of 2018, many were eager to see how it impacted the alcohol market. In the first full year of marijuana legalization, domestic beer volumes in Canada fell 3.9% compared to 2018. Constellation, like other alcohol companies, is trying to get ahead of that shift in consumer demand through its investment in Canopy, but it hasn't been smooth sailing so far. The company disclosed a loss of $484.4 million on its investment last year, and losses have continued. Canopy Growth reported its second billion-dollar quarterly loss this year as it continues its turnaround plan.
Constellation has slowly replaced Canopy's C-suite. After firing co-founder Bruce Linton, Canopy's CEO David Klein took the helm after previously serving as Constellation's CFO and Mike Lee, who also previously worked at Constellation, is now Canopy's CFO. Canopy's Chief Insights Officer Chris Edwards also hails from Constellation.
"They certainly have brought a ton of expertise with them, which has allowed us to continue to focus and refine our strategy on beverages, but really across our entire business," Rapsey said.
Rapsey said Constellation's expertise and advice, from manufacturing to marketing to consumer insights, on the beverage category has helped with the drinks launch in Canada. "I think it's a big reason why we were able to get to market quicker than others," Rapsey said.
Canopy's CEO David Klein said during a virtual Barclays Global Consumer Staples Conference event last week that when he took over Canopy in January, his priority was to get the company on a path to profitability and that required strategic direction. He said he wanted to create a cannabis CPG company and that they've since made progress by building a consumer insights organization, and focusing the business on the U.S., Canada and Germany while exiting some other international markets.
"Those markets really make up about 90% of what we expect the total addressable market to be over the next several years," he said.
Klein said one of the issues so far has been getting high-quality consumer insights data back because they've struggled, up until about a few weeks ago, to keep the product on the shelf and to have that product available consistently for consumer repurchase because demand has been so high.
The global cannabis beverages market is expected to hit $2.8 billion by 2025, growing at an annual rate of 17.8%, according to a recent report by Grand View Research.
"Across North America there are just millions of consumers that probably love cannabis, but just don't know it and they're unlikely to enter the category through inhalables so that's why I think there's a path to dramatically expanding the overall market by bringing these consumers in through things like gummies and so forth," Klein said.
Path to the U.S.
The 2018 Farm Bill legalized hemp cultivation and a growing number of states are making their own laws about cannabis legalization, but it remains in a regulatory gray area. The FDA held a public hearing last year to determine if there should be a pathway to market for the ingredient, but the agency recently told manufacturers that cannabis was not Generally Recognized as Safe for use in food and it was still working through regulation. Many CBD brands have still launched in states that have legalized.
Klein said Canopy's strategy in the U.S. is around building a cannabis and hemp ecosystem the company can benefit from post-permissibility. Canopy licensed the rights to its cannabis drinks line in the U.S. to Acreage Holdings. Klein said Canopy can drive innovation in Canada, test it out and then be prepared to bring it to the U.S. post-permissibility or Acreage can bring it to the U.S. before broad legalization.
"It starts with the relationship with Acreage, whereby we take a controlling interest in Acreage upon permissibility. In the meantime, Acreage can bring our intellectual property, meaning our processes and procedures, but also our brands to the U.S.," Klein said. "But more importantly, as we innovate and create things like the drinks that we're so excited about, Acreage has the right to bring those drinks to the U.S. as soon as they're ready. They're working on that now and hopefully we hear from them soon as to where that's going to land."
"It's going to be a massive, massive growth opportunity and strategically we've made the decision to invest ahead of revenue."
CFO, Canopy Growth
Mike Lee, CFO of Canopy, said at Barclays that part of Canopy's current losses are a result of investing in the U.S. now. He called that a strategic choice because the U.S. is expected to be a $60 billion market for THC eventually and within the next few years, it's going to be a $10 billion CBD market.
"It's going to be a massive, massive growth opportunity and strategically we've made the decision to invest ahead of revenue," Lee said.
When asked about federal legalization in the U.S., Klein predicted 2022. He said that as more states legalize recreational and medicinal use, U.S. legislators will find it hard to not vote in favor of federal legalization and so he thinks "we'll see a lot of momentum around cannabis legislation over the next several months." And whether it is President Donald Trump or former Vice President Joe Biden who wins the 2020 presidential election, Klein said both would likely support whatever came out of Congress in the area of permissibility legalization.
Rapsey said that operating within regulations is "the way to go." In Canada, he said there are very strict rules around marketing communications, which can make it difficult to promote products the same way he would have other consumer goods products. "Achieving brand awareness and brand loyalty is definitely more of a challenge," he added.
But he said Canopy understands the reasoning behind the federal regulations because it is a brand new industry, and they're open to the challenge of proving themselves to consumers and regulatory bodies over time.
"This is not a short-term thing so we will kind of play ball and hope that as we and the category proves itself, the regulations will ease as people realize that this is not a detriment to people's health," he said.
When the time comes, its experience and insights from Canada could be useful for the U.S. For instance, Rapsey said Canopy launched THC-infused beverages with lower dosages than what's common in the U.S. market today.
"We believe that cannabis beverages at this potency are an attractive option for what have traditionally been alcohol-driven occasions," he said. Social occasions where consumers might have a glass of wine or beer, for example. "So our goal is to give people, social sessionable occasions, without any of the traditional pain points of beverage alcohol. So, if we can give you the buzz and a moment of relaxation, without a hangover or any wasted calories or bad taste, why wouldn't people choose that option? That's been our hypothesis from day one in this category, and it's proving out to be the case."