“2021: A Pivotal Year for the Cannabis-Infused Food and Beverage Industry Amid Regulatory Changes and Market Opportunities”
Leading up to the beginning of last year, there were significant expectations for the cannabis-infused food and beverage industry. Venture capital investments were on the rise, experienced executives were entering this trendy sector, and established companies committed to launching new products. However, 2020 did not turn out to be the breakthrough year for cannabis that many had hoped for. While the industry made strides, the pandemic hindered product development as numerous companies redirected their focus towards COVID-19. Additionally, federal regulations remained ambiguous, leaving many questions unanswered.
Nevertheless, analysts and industry players are now suggesting that 2021 could indeed be the year cannabis breaks through. In the most recent election cycle, more states legalized cannabis, and a new presidential administration is set to enter with a Democratic-controlled Congress, potentially prompting the FDA to establish a federal regulatory framework. “We’re witnessing legalization expanding into markets that previously posed challenges for cannabis advocates… so I anticipate this trend to continue over the coming year,” stated Alex Esposito, a research analyst at Euromonitor International. “As more recreational markets emerge, we generally expect an increase in the availability of edible and beverage options.”
With potential regulatory changes on the horizon, numerous companies are making their way into the U.S. market with products containing CBD, the popular non-psychoactive compound derived from cannabis and hemp, as well as THC, the most recognized psychoactive element. Several Canadian companies are entering the U.S. market via acquisitions and preparing launch strategies that could disrupt the category and entice larger players to join. “The U.S. is anticipated to be the largest market opportunity globally, and we will be well-prepared to compete in the U.S. once cannabis is federally allowed,” remarked Irwin Simon, chairman and CEO of Aphria, a Canadian cannabis firm expanding into the U.S. through a recent brewery acquisition.
The regulatory landscape for cannabis and CBD is complex, involving state legalization efforts and FDA oversight. Analysts indicate that these evolving conditions are gradually moving in a positive direction for the industry. The enactment of the 2018 Farm Bill, which classified hemp and its derivatives as non-controlled substances, marked a significant advancement for CBD sourced from this cannabis plant relative. However, it remains federally illegal to incorporate cannabis and its derivatives into food and beverages. Nearly two years have passed since the FDA’s first public hearing on CBD, where manufacturers advocated for clearer guidelines.
While more states have created their own regulations and voted to legalize cannabis, enabling additional companies to test their products in the market, the FDA has continued to send warning letters to businesses that inaccurately advertise CBD with therapeutic claims. “I hope this is finally the year that the FDA establishes some guidance,” stated Henry Baskerville of Fortis Law Partners. “The lack of regulations is detrimental to the industry, as it makes consumers more hesitant to try these products, which might otherwise be readily accepted if the FDA at least acknowledged them.”
Jeremy Kahn, a spokesperson for the FDA, mentioned in an email that the agency is “working towards providing additional guidance and has made considerable progress.” He stated that the FDA is exploring potential pathways for various types of CBD products to be legally marketed, gathering research and safety data to inform its approach. “The FDA recognizes the substantial public interest in marketing and accessing CBD for a range of products,” Kahn added. “There are many questions to address concerning the science, safety, effectiveness, and quality of CBD-containing products, and we must conduct our due diligence.”
A positive development occurred in December when the House of Representatives passed the Marijuana Opportunity Reinvestment and Expungement Act, aiming to decriminalize marijuana nationally by removing it from the government’s Schedule I controlled substance list. However, with a new Congress, the bill would need to be reintroduced, pass again in the House, and likely face challenges in the Senate. The FDA would still be responsible for regulating cannabis’ inclusion in food and beverages.
At a recent BevNet forum, Rick Maturo, associate director of client services at Nielsen’s cannabis practice, characterized the vote as “more ceremonial than anything else.” Nonetheless, he noted, “This clearly indicates that cannabis no longer carries the stigma it did five years ago, and this trend will continue to gain traction and attract more attention from traditional consumer packaged goods companies.”
Mike Gruber, vice president of regulatory and government affairs at the Consumer Brands Association, concurred that the marketplace requires stability. The CBA has been advocating for increased resources, research, and a national regulatory framework for CBD in recent years. “I believe 2021 is a pivotal moment for all stakeholders to support legislation that grants the FDA additional authority and funding to establish a robust national standard for CBD and other hemp derivatives used in food, beverages, topicals, and other products,” Gruber expressed.
Given the political shift in the executive and legislative branches, this pivotal moment may be closer to becoming a reality. With President-elect Joe Biden taking office and Democrats controlling Congress, there is renewed optimism surrounding this issue. The recent blue victory in Georgia during the run-off election sparked hopes for federal decriminalization, which positively impacted cannabis stocks such as Canopy Growth.
“What we observed from the recent presidential election was favorable momentum for the cannabis industry. We believe Biden’s victory will heighten pressure on Congress to enact significant federal marijuana reform in the near future,” stated Tara Rozalowsky, vice president of beverages and edibles at Canopy Growth. A spokesperson for Biden referred Food Dive to his previously stated position: he aims to decriminalize cannabis use and supports medical legalization, leaving recreational legalization decisions to the states. Biden also advocates for rescheduling cannabis as a Schedule II drug, allowing researchers to study it.
Baskerville noted that while Biden has been “lukewarm, to put it mildly, regarding legalization,” the Democratic Party as a whole is more supportive. “The writing is on the wall; this is one of the few issues that has widespread bipartisan support, and it is only a matter of time before cannabis is descheduled,” Baskerville asserted. In 2021, recreational use will be legal in 15 states, while medical use will be legal in 35 states. Despite the patchwork of state regulations for cannabis, “it is only a matter of time before it is federally legalized,” said Tyler Williams, chief technical officer and founder of Cannabis Safety & Quality.
Williams anticipates that the FDA will consider state regulations and those from other countries, such as Canada. “If I were in the FDA’s position, I would look at regulations globally, selecting the best practices and adapting what works. Science should guide everything because the industry has had enough of arbitrary standards,” he mentioned.
The pandemic has also complicated some regulatory processes and product launches. As consumers rushed to stock up on food, many companies prioritized maintaining production of existing products over developing new ones. Bolthouse Farms, known for its smoothies and juices, previously announced plans to launch CBD-infused products in 2020. Over a year later, a spokesperson stated the company is “still navigating the regulatory environment to introduce any CBD products.”
“Unfortunately, COVID has effectively stalled all state and federal momentum on this subject, resulting in minimal progress,” the spokesperson noted, refraining from providing a timeline for the new product line. In 2019, Unilever’s Ben & Jerry’s brand announced plans to create CBD-infused frozen treats once FDA regulations were established. Ben & Jerry’s spokesperson Sean Greenwood confirmed via email that the company remains on hold for any new CBD product development but urged consumers to “stay tuned in 2021 for any updates.”
“COVID operations have posed challenges as we are unable to work at our office and are adapting to remote work to ensure employee safety. However, we’re still interested in CBD products, as it’s something our fans have expressed interest in,” Greenwood added. Investors have also approached the space cautiously due to regulatory risks, and brands must carefully adhere to state guidelines for advertising, transportation, and manufacturing products.
Despite these hurdles, some momentum has been achieved over the past year, with brands gaining early-mover advantages by launching in states with legal markets while awaiting federal guidance. Late last year, Pabst Labs introduced the initial launch of Pabst Blue Ribbon Cannabis Infused Seltzer in California. Although PBR is licensing its name to the brand, no financial transaction was involved, allowing Pabst Brewing to avoid regulatory risks associated with the substance.
Mark Faicol, brand manager of Pabst Labs, shared that the seltzer, containing 5 mg of THC per 12-ounce can, underwent about two years of development before it was deemed “worthy” of the PBR name. “A national brand entering this space has never been done before. The significance of that should not be underestimated,” Faicol remarked. “Many major brands bring their well-established audiences and a level of trust.”
Faicol, who previously worked for Pabst Brewing Co., emphasized that PBR is a classic brand continually reimagining itself as “more than just a beer company.” He noted that demand for a cannabis-infused drink featuring PBR’s name existed even before the product was developed. Pabst Labs has already experienced success with the product and plans to expand production this year. According to Faicol, the company sold out of its initial production runs immediately and intends to enter additional states.
While recognizing the challenges posed by regulations and the need for broader consumer education, Faicol expressed high expectations for the product. “We understand the uphill battle ahead, but we are eager to tackle it and collaborate with other key players in the space to foster growth,” he concluded.
Numerous smaller brands have launched in states where cannabis is legal. For instance, Recess has quickly emerged as one of the most popular CBD beverage brands in the United States. CEO and Founder Ben Witte stated that the company focused on establishing its business foundation in 2020, expanding into key markets, enhancing its supply chain, and investing in innovations slated for launch this year. Witte expressed confidence that 2021 “will be a significant breakout year for us.”
“I believe part of Recess’s business strategy has been to become the category-defining and first-mover brand in this emerging sector,” he added. The company has gained insights into the usage occasions for Recess over the past year. Previously, consumers might have enjoyed drinks at a local bar after work, but during the pandemic, many have turned to Recess as an alternative to alcohol in the evening. “Do you really want to drink alone at home after a long day? Instead, take a Recess, and that concept is rapidly gaining popularity,” Witte observed. “We are well-positioned to drive the market forward, but we welcome more entrants. We want this category to thrive.”
Federal regulations surrounding cannabis-infused products will play a vital role in this potential. Witte noted that Recess’s business plan has always been centered on regulation since he did not want to market a controlled substance indefinitely. He sees “a light at the end of the tunnel” and anticipates that this year will focus on pushing for FDA clarity, expecting some progress from the agency in the next 12 months.
Over the past year, Canada—where cannabis-infused products can now be sold at retail—has served as a testing ground for U.S. market entry. Canadian companies are now venturing into the U.S. market, while many of their American counterparts remain on standby. Canadian cannabis giant Aphria announced last year that it is expanding into the U.S. through a $300 million acquisition of SweetWater Brewing Co., one of the largest independent craft brewers in the U.S. Aphria has multiple medical and recreational cannabis brands in Canada.
“The beer and cannabis industries have become closely linked in recent years, as both sectors are ripe for a crossover audience. We can expect to see continued mergers and acquisitions between cannabis companies and beer brands, and vice versa,” stated CEO Simon. “It’s only a matter of time before the U.S. progresses toward federal cannabis legalization, and developing infrastructure in advance will remain a top priority.”
Simon indicated that Aphria sees “a tremendous market for CBD and THC beverages in the future.” SweetWater’s distribution across 27 states and Washington, D.C., provides a “recognizable foothold in the U.S. with long-term potential.” With this acquisition, SweetWater plans to expand its reach beyond those states and internationally. Aphria is also preparing to introduce its Broken Coast, Good Supply, Riff, and Solei brands to the U.S. by this winter.
Aphria strengthened its position in the consumer packaged goods sector with its recent merger with Tilray, a Canadian pharmaceutical and cannabis company that owns Manitoba Harvest, the largest hemp foods manufacturer globally, and partners with AB InBev. However, Aphria isn’t the only Canadian firm seeking to exploit early-mover advantages across North America. Recently, Truss CBD USA, a joint venture largely owned by Molson Coors Beverage Co. and operated alongside Canadian cannabis producer Hexo, launched Veryvell, a line of nonalcoholic sparkling CBD beverages in Colorado.
Canopy Growth is also set to launch cannabis-infused beverages in legal markets in California and Illinois this summer through its partnership with Acreage Holdings. Following a delayed launch in Canada, Canopy Growth—backed by U.S. alcohol giant Constellation Brands—has already achieved “great success to date” with its cannabis-infused beverages in Canada, holding approximately 50% of the market share, according to Rozalowsky.
“With nearly a year’s worth of sales data for the Canadian market available, combined with Constellation’s expertise in the beverage alcohol sector, we understand that summer is an optimal time to launch a beverage brand or product to capitalize on consumer demand spikes during pivotal summer months,” Rozalowsky noted. She added that the cannabis-infused beverage category is fragmented, with numerous brands in the U.S. but no clear leader, presenting Canopy with an opportunity to capture significant market share.
Euromonitor forecasts that the market for adult-use cannabis, including beverages and edibles, in the U.S. will grow from approximately $11.5 billion in 2020 to $53.6 billion by 2025. “Based on current consumer demand trends, we believe that the North American market potential for cannabis-infused beverages is extremely promising and has the capacity to disrupt other traditional beverage categories, including beverage alcohol, sports and energy drinks, and sparkling waters,” Rozalowsky concluded.
