In the booze business, summer is “showtime.” Warm weather packs patios. Backyards fill up for barbeques. Absent a global pandemic, the trend is about as reliable as sand at the beach.
For Canopy Growth (WEED.TO)(CGC), the world’s largest cannabis company backed by the American purveyor of summertime staple Corona beer, the next few months are going to be an important test for its pot drinks. Investors will get to decide if the company’s beverage bet is paying off as cannabis fights an uphill battle for a home inside Canadian coolers.
Buzz about an alcohol-disrupting cannabis drink from Canopy gained traction as booze behemoth Constellation Brands (STZ) pumped billions into the Canadian pot producer in the summer of 2018.
Initially set for release in early January, the company launched Tweed Houndstooth & Soda, a sativa-dominant fizzy drink with notes of its Houndstooth cannabis strain, in mid-March. A second drink under the company’s Tweed banner hit retailers on Monday, an indica-dominant ginger ale.
Bill Newlands, Constellation’s chief executive officer, has taken a shining to the word “game-changer” to describe the new offerings that Canopy has long-claimed sets it apart from rivals in the sector that have been slower to pursue drinks. Newlands repeated the term in an interview with Yahoo Finance on Tuesday. It’s meaningful praise, given his demonstrated willingness to publicly shame Canopy’s lacklustre performance.
Both of Canopy’s drinks on the market today have two mg of psychoactive THC, enough for most people to catch a moderate high within a few minutes before deciding if they want to pull the tab on another slender black can.
Data from U.S. legal states recently cited by CIBC shows drinks command only one to two per cent of cannabis sales. However, the category is growing fast, showing an uptick during the COVID-19 pandemic.
For Canopy, sales have been brisk so far, according to Paul Weaver, the company’s director of innovation. He said Houndstooth & Soda sold out quickly in most markets, although he wouldn’t say how much inventory was ordered by provincial distributors.
Last fall, Canopy revealed its initial lineup of 13 infused drinks, ranging from cans of sparkling soda to multiple serving bottles of distilled cannabis for mixing into a drink of choice.
Canopy told Yahoo Finance Canada this week that Houseplant Grapefruit, a sparkling water with 2.5 mg of THC per can developed under Seth Rogen and Evan Goldberg’s pot brand, will be next to launch “in coming weeks.”
Canopy said the next release soon after that will Deep Space, its strongest drink at 10 mg of THC per can. The company said dates will likely vary by province.
The mass closure of bars, restaurants and other venues where alcohol is sold in order to enforce social distancing has eliminated a major spending magnet for booze in the near-term. Ontario’s government launched a public consultation on cannabis lounges and special occasion permits for outdoor events in February. But given the impacts of COVID-19, the timeline for new rules is far from clear.
When it comes to online sales, buying a six-pack of beer and six cannabis drinks for home consumption are two very different transactions.
Cannabis purchases are legally limited to the equivalent of 30 g or less. Under the current regulations, each Tweed can is equal to about 5 g of dried flower. An order for six cans of Houndstooth & Soda works out to 30.6 g, meaning multiple orders would be required for anyone looking to stock their fridge for a long weekend.
“There is a gram equivalency that’s associated with cannabis beverages that’s a bit inconsistent with the experience,” Weaver said. “When you buy one of our cannabis drinks, in the eyes of the regulations, that’s deemed as buying five grams of dried flower. It doesn’t quite add up. It’s definitely less active ingredient than five grams of flower.”
Adding to the confusion, a more potent 10 mg of THC per serving drink product from rival producer The Green Organic Dutchman (TGOD.TO) equates to just 0.03 g of the 30 g limit, allowing consumers to purchase in greater volume. It’s a tube of dissolvable THC powder meant to be added to beverages and food.
“There is some room to reinterpret and rewrite the equivalency laws for these types of advanced products to be a bit more grounded in the consumer experience,” Weaver said. “We’re not the only ones experiencing that issue. Let’s assume that’s a gap that will be fixed over time.”
Weaver’s job at Canopy boils down to commercializing the pot giant’s research and development, essentially taking ideas from laboratory whiteboards and putting finished products in the hands of consumers. Prior to joining the legal pot industry, he spent nearly seven years in an innovation role at Molson Coors Canada (TPX-B.TO). Perhaps unsurprisingly, he sees bars and restaurants as key to building the popularity of pot drinks.
“Brands are built in the alcohol space in the bar and restaurant environment. We would not expect anything different for cannabis beverages,” he said. “We all learned how to put a lime wedge in our Corona. You probably learned that in a bar or on a patio.”
Plugs for Constellation’s beer aside, Weaver is thinking about branding tricks from glassware to taps to lure bar patrons towards cannabis. But without regulations in place, it’s unclear what kind of neon signs or novelty packaging will be allowed, if any. He’s optimistic that the regulatory sandbox he has to play within today will evolve, perhaps to allow drink and edible products stronger than 10 mg per serving.
“Our ability to deliver a wide variety of consumer experiences under 10 mg really does result in minor nuances of brand and flavour and packaging,” Weaver said.
Cannabis 2.0 products have been slow to trickle onto the market in Canada since new formats like vapes, candies, mints, drinks and topicals were legalized last year. So far, it hasn’t been the revolution investors hoped for. Weaver hopes the weather will be on Canopy’s side.
“It’s going to be a bright summer,” he said. “Showtime, as they call it in the beverage alcohol industry.”
Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.
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