Editor's note: This story is part of a series on the trends that will shape the food and beverage industry in 2021. You can find all the articles on our trendline.
There were big expectations for the cannabis-infused food and beverage space leading up to the start of last year. Venture capital investment was increasing, seasoned executives were jumping into the trendy space and established players pledged to launch products.
But 2020 was not the breakout year for cannabis that some had anticipated.
Although the industry made progress, the pandemic slowed down product development as many companies shifted focus to the coronavirus. Federal regulation also stayed in a gray area, with no further guidance and many questions around the space unanswered.
But now analysts and companies are saying that 2021 could in fact be cannabis' breakout year. More states legalized cannabis in the last election cycle and a new presidential administration is coming in with a Democratic-controlled Congress that could push the FDA to issue a federal regulatory framework.
"We're seeing legalization spread to markets that were a challenge for cannabis activists in the past ... so I expect that to continue in the coming year," said Alex Esposito, research analyst at Euromonitor International. "As more recreational markets come online, we generally expect there to be more availability of edible and beverage formats."
With potential regulatory changes on the horizon, more companies are moving into the U.S. market with products that have CBD, the popular nonpsychoactive compound of the cannabis and hemp plants, and THC, the most well known psychoactive component. Several companies from Canada are entering the U.S. market through acquisitions and readying launch plans that could shake up the category — and push more big-name players to jump in.
"The U.S. is expected to be the largest market opportunity globally and we will be ready and well positioned to compete in the U.S. when cannabis is federally permissible," said Irwin Simon, chairman of the board and CEO of Aphria, a Canadian cannabis company that is entering the U.S. market through a recent brewery acquisition.
How regulation and elections are shaping up
There are a lot of moving pieces in the regulatory space when it comes to cannabis and CBD, from state legalization and legislation to FDA regulation. But analysts say those moving parts are taking small, positive steps for the industry.
The passage of the 2018 Farm Bill, which allowed hemp and its derivatives to no longer be classified as controlled substances, was a significant move for CBD, which can be sourced from this relative of the cannabis plant. However, it is still federally illegal to add cannabis and its derivatives to food and drink. It's been nearly two years since the FDA's first public hearing on CBD, where manufacturers pushed for more clarity.
Although more states have developed their own regulations and voted to legalize cannabis, which has allowed more companies to market-test products, the FDA has continued to issue warning letters to businesses that are improperly advertising CBD with therapeutic and drug-like claims.
"I hope that this is finally the year that the FDA creates some guidance," said Henry Baskerville of Fortis Law Partners. “In a way it's really harming the industry to have no guardrails because for a lot of reasons it makes it so that consumers are maybe more reluctant to try the products than they otherwise would if they were at least passively accepted by the FDA.”
Jeremy Kahn, a spokesperson for FDA, said in an email that they are "working toward a goal of providing additional guidance, and have made substantial progress." Kahn said the FDA is looking into potential pathways for various types of CBD products to be lawfully marketed and is working to get research, data and other safety input to inform its approach.
"The FDA recognizes that there is substantial public interest in marketing and accessing CBD for a variety of products," Kahn said. "There are many questions to explore regarding the science, safety, effectiveness and quality of products containing CBD, and we need to do our due diligence."
One positive development happened in December, when the House of Representatives passed the Marijuana Opportunity Reinvestment and Expungement Act. The bill sought to decriminalize marijuana nationally by removing it from the government’s Schedule I controlled substance list. With a new Congress, it would need to be reintroduced, pass again in the House and will still likely have challenges in the Senate. The FDA would still determine regulation for cannabis' inclusion in food and drink.
At a recent BevNet forum, Rick Maturo, associate director of client services at Nielsen's cannabis practice, described the vote as "very ceremonial more than anything." That said, "it really just shows yet again that cannabis does not carry the stigma that it carried five years ago, and that's going to continue to barrel forward and garner more attention from conventional consumer packaged goods companies," he said.
Mike Gruber, vice president of regulatory and government affairs at the Consumer Brands Association, agreed that the marketplace needs stability. CBA has been advocating for additional resources, research and a national regulatory framework around CBD for the last few years.
"I think there's a pivot point here for 2021 for all stakeholders to get behind legislation that provides FDA additional authority and additional funding to create a durable, national standard for CBD and other hemp derivatives that may be used in food, beverages, topicals and other products," Gruber said.
That pivot point could be closer to reality given the shift in politics at the executive and legislative branches. With President-elect Joe Biden headed to the White House and Democrats taking control of Congress, optimism around this issue is up. When Georgia turned blue this month in a run-off election, hopes of federal decriminalization helped push up cannabis stocks like Canopy Growth.
"What we saw from the recent presidential election was positive momentum for the cannabis industry. We believe that Biden’s win will increase pressure on Congress to pass major federal marijuana reform in the near future," said Tara Rozalowsky, vice president of beverages and edibles at Canopy Growth.
"I think there's a pivot point here for 2021 for all stakeholders to get behind legislation that provides FDA additional authority and additional funding to create a durable, national standard for CBD and other hemp derivatives that may be used in food, beverages, topicals and other products."
Vice president of regulatory and government affairs, Consumer Brands Association
A spokesperson for Biden directed Food Dive to his previously posted position: He wants to decriminalize cannabis use and supports the legalization for medical purposes, while leaving decisions regarding legalization for recreational use up to the states. Biden also supports rescheduling cannabis as a Schedule II drug so researchers can study it.
Baskerville said that although Biden has been "lukewarm, to put it lightly, about legalization," the Democratic Party in general is in favor of it. "I think the writing is on the wall that it's one of the few issues that has broad bipartisan support, and I think that it's only a matter of time until cannabis is descheduled," Baskerville said.
In 2021, recreational use will be legal in 15 states and medical use will be legal in 35 states. Despite the patchwork of state regulations for cannabis, "it's only a matter of time before it gets federally legalized," said Tyler Williams, chief technical officer and founder at Cannabis Safety & Quality.
Williams expects FDA to be looking at state regulations and those in other countries, such as Canada. "If I was putting myself in the shoes of the FDA, I would look at regulations across the board, and pick and choose from the best ones, pick and choose what works and what doesn't work. Then obviously base everything off of science because the industry has had enough of arbitrary numbers," he said.
The waiting game on when to jump into the market
The pandemic has also bogged down some of the regulatory process and product introductions. As consumers cleared shelves in their rush to stockpile food, many companies focused on maintaining production of their existing products instead of developing new ones.
Bolthouse Farms, a maker of smoothies and juices, previously said it would launch CBD-infused products in 2020. More than a year has passed since the announcement, and a spokesperson said in an email the company is “still working through the regulatory environment in order to introduce any CBD products.”
"Unfortunately, COVID has essentially stalled all state and federal momentum on the topic so there hasn’t been much movement on that front," the spokesperson said, declining to provide a timeline on the new product line launch.
In 2019, Unilever’s Ben & Jerry's brand said it would create CBD-infused frozen treats once there are regulations in place from the FDA. Ben & Jerry's spokesman Sean Greenwood said in an email the company remains on hold on any new CBD product development, but to "stay tuned in 2021 for any updates."
"COVID operations have posed a challenge as we’re not able to work at our office and we’re making it a go remotely to ensure safety of our employees. We’re still interested in CBD products as it’s something that our fans expressed interest in," Greenwood said.
Investors have also been wary of the space because there is some regulatory risk involved, and brands need to be careful to follow any state guidelines for advertising, transporting and manufacturing products.
There has been some momentum in the past year, with brands securing an early-mover advantage by launching in states that have legal markets while awaiting more federal guidance.
Late last year, Pabst Labs announced the initial launch of Pabst Blue Ribbon Cannabis Infused Seltzer to customers in California. Although PBR is licensing its name to the brand, no money was involved in the agreement and Pabst Brewing doesn't have a stake in Pabst Labs, which helps it avoid any regulatory risk associated with the substance.
Mark Faicol, the brand manager of Pabst Labs, said that its seltzer, which contains 5 mg of THC per 12-ounce can, was in development for about two years before it became "worthy" of the PBR name.
"A national brand heading into the space has never been done before. Let's not underscore the significance of that," Faicol said. "I think a lot of big brands ... bring their audience that they know how to talk to really well. And No. 2, they bring a level of trust."
Faicol, who previously worked for Pabst Brewing Co., said PBR is a classic brand, but is constantly reimagining itself as "more than just a beer company." Faicol said there was already demand for a cannabis-infused drink with PBR’s name on it before they developed it.
Pabst Labs has already seen success with the product and is planning to expand production this year. It sold out of its initial two production runs immediately, according to Faicol, who said the company plans to expand to selling in other states. Having a brand name that "transcends generations" carries weight, Faicol said, but there are still challenges with regulation and broader consumer education.
"We have very high expectations, but I think at the same time we fully realize ... that it's going to be an uphill battle and challenge. But we're willing to take that challenge on and work with other key players in the space to try and grow it," Faicol said.
Recess’ CEO and Founder Ben Witte said the company focused on establishing the base of its business in 2020, growing in key markets, building out the supply chain and investing in innovation that will launch this year.
Witte said the company spent the last year getting positioned for 2021, "which will be a big breakout year for us."
“I definitely think part of the business plan for Recess was to become really the category-defining and first-mover brand in this emerging category,” Witte said.
The company has learned a lot about the usage occasion for Recess during the past year. Previously, consumers may have gotten drinks at a local bar after work, Witte said. But during the pandemic, many people are using Recess as a substitute for alcohol in the evening.
"Do you really want to drink at home by yourself at the end of the day? Take a Recess instead, and that idea is just exploding in popularity," Witte said. "We are well positioned to continue to drive [the market] forward but we welcome more entrants. We want this category to exist in a big way."
Part of what will enable this potential is federal regulations around cannabis-infused products. Witte said Recess' business plan from the beginning was oriented around regulation since he didn’t want to sell a controlled substance indefinitely. But he sees "a light at the end of the tunnel."
The exec, who also serves as executive vice president of the U.S. Hemp Roundtable, said this year the attention will be focused on driving FDA clarity, and he expects something to come from the agency in the next 12 months.
Big moves bring Canada's momentum to the U.S.
Over the last year, Canada — which now allows cannabis-infused products to be sold at retail — has served as a testing ground for the U.S. debut. Canadian companies are now entering the U.S. this year as many of their American counterparts wait on the sidelines.
Canadian cannabis giant Aphria announced late last year it was expanding into the U.S. with its $300 million acquisition of SweetWater Brewing Co., one of the biggest independent craft brewers in the U.S. Aphria has several medical and recreational-use cannabis brands in Canada.
"The beer and cannabis industry have been tied closely in recent years as both industries are ripe for a cross-over audience. We will continue to see mergers and acquisitions when it comes to cannabis companies purchasing beer brands and vice versa," said CEO Simon. "It’s only a matter of time before the U.S. moves closer towards federal legalization of cannabis and building out infrastructure in advance will continue to be a top priority."
Simon said that Aphria sees "a huge market for CBD and THC beverages in the future." Since SweetWater has distribution across 27 states and Washington, D.C., it provides a "recognizable foothold in the U.S. with long-term potential." With the acquisition, SweetWater will grow beyond those states and internationally, Simon said. The Aphria team is also preparing to introduce its Broken Coast, Good Supply, Riff and Solei brands to the U.S. by this winter.
Aphria also grew its foothold in the consumer packaged goods space with its recent merger with Tilray, a Canadian pharmaceutical and cannabis company that owns Manitoba Harvest, the world’s largest hemp foods manufacturer, and is a partner of AB InBev.
But Aphria is not the only Canadian company looking to take the early-mover advantage across North America. Last week, Truss CBD USA, a joint venture majority owned by Molson Coors Beverage Co. and operated with Canadian cannabis producer Hexo, launched Veryvell, a line of nonalcoholic sparkling CBD beverages in Colorado.
Canopy Growth will also be launching cannabis-infused beverages in legal-use markets in California and Illinois this summer through its partnership with Acreage Holdings. After a delayed launch in Canada, Canopy Growth, which is backed by U.S. alcohol giant Constellation Brands, has seen “great success to date” for its cannabis-infused beverages in Canada, and currently holds about 50% market share, Rozalowsky said.
“With almost a year’s worth of sales data available for the Canadian market, paired with Constellation’s experience in the beverage alcohol space, we know that summer is an ideal time to launch a beverage brand or product in order to capture consumer demand spikes during key summer months,” Rozalowsky said.
The cannabis-infused beverage category is fragmented, she noted, with numerous brands in the U.S. but no clear leader. This gives Canopy the opportunity to capture significant market share, she added.
Euromonitor forecasts the market for adult-use cannabis, including in beverages and edibles, in the U.S. will grow from about $11.5 billion in 2020 to $53.6 billion in 2025.
"From what we've seen so far in terms of consumer demand, we believe that the North American market potential for cannabis-infused beverages is extremely promising and has the potential to disrupt other traditional beverage formats including beverage alcohol, sports and energy drinks and sparkling waters," Rozalowsky said.