Interview With Terry Donnelly, Cannabis Beverage Producers Alliance

Interview With Terry Donnelly, Cannabis Beverage Producers Alliance
Interview With Terry Donnelly, Cannabis Beverage Producers Alliance

Cannabis-infused beverages are now legal in Canada with Phase 2 of legalization. Listen to our discussion of these new products with Terry Donnelly, Co-Founder of Canada's Cannabis Beverage Producers Alliance.

We'll look at the regulatory obstacles, but also the upside. Unlike cannabis-infused beverages in the U.S., infused beverages in Canada are expected to price-competitive with alcohol products.

 
Transcript:

JN: Hello, I'm Jeff Nielson the senior editor of The Seed Investor. I have the pleasure today of speaking with Terry Donnelly. Terry is the CEO of Hill Street Beverage Company [CAN:BEER / US:HSEEF]. He is also the Co-Founder of the Cannabis Beverage Producers Alliance in Canada.

Well it's finally here. Phase 2 of cannabis legalization has arrived in Canada. Cannabis 2.0 brings a wide array of new cannabis derivative products for consumers. Concentrates edibles topicals and cannabis-infused beverages.

These products became legal in Canada on October 17th, 2019. With Health Canada's review period for initial product offerings nearly complete new products are expected to start reach new storage shelves by mid December.

Cannabis-infused beverages have been a small part of the overall cannabis market to date even in
the US states for such products are legally available. However, there is a tremendous buzz within cannabis industry considering the commercial potential of these products.

Why? New technology.

Next-generation cannabis infused beverages closely mimic alcoholic beverages both in terms of onset of effects and metabolizing the active ingredients. More generally, as water-based creatures sipping on a beverage at social occasions is almost as natural as breathing.

Now cannabis consumers in Canada have the option of drinking their cannabis. Multinational alcohol distributors have already moved into the cannabis industry, smelling both opportunity and new competition.

Constellation Brands [US:STZ] maker of Corona beer has invested heavily in Canadian cannabis giant Canopy Growth [US:CGC / CAN:WEED]. Molson Coors [US:TAP] has a joint venture in place with Quebec-based HEXO Corp (US:HEXO / CAN:HEXO).

Molson Coors has already publicly predicted that by itself cannabis-infused beverages could become a [CAD]$3 billion market in Canada. But there's a catch. Government regulation.

We're here today to get the details on new Canadian regulations for cannabis-infused beverages. We’ll also identify the number one regulatory hurdle in fully commercializing these products from Terry Donnelly, Co-Founder of the Cannabis Beverage Producers Alliance.

Thank you for joining me today Terry.

TD:  My pleasure Jeff.

JN: Before we get into the cannabis-infused beverage market in Canada please introduce the Cannabis Beverage Producers Alliance to our audience.

TD: Well the Cannabis Beverage Producers Alliance was formed to really provide an effective voice to speak to government on behalf of the entire industry.

To date, the members of the Beverage Producers Alliance represent mostly small up-and-coming craft companies like us so it's a collection of about 15 companies that are advanced involved in all aspects of the market from packaging to engineering the beverage production facilities to co-packers to producers like myself at our firm.

So it really you know has representation from all aspects of the sector and we expect it to grow both in terms of its importance and its membership as the industry launches and new players arrive on the scene.

JN: So a deep presence in the cannabis industry.

We have lots to discuss today so let's get straight to the main issue here. What is the number one problem facing Canadian cannabis companies and cannabis consumers as cannabis-infused beverages are legalized.

TD: well obviously the biggest problem that we face is really getting access to the consumer. I mean you know there's really only one or two provinces in Canada that have the appropriate number of retail outlets for consumers to be able to go and purchase these products and that's Alberta and Saskatchewan.

Alberta has roughly around 350 retail locations and is adding more literally every week and Saskatchewan is around 40 maybe 35 to 40 retail locations and is projected to grow to about 50 locations with a population of about a million people.

Conversely in Ontario, you have right now less than 25 locations open and a population of 14 million people so there's nowhere near the number of stores that you would have for our cannabis products that you would need to provide enough access for consumers to be able to go and purchase a product.

Then secondarily the wholesaling that supports the major markets both Ontario and Quebec as woefully inadequate to be able to allow beverages and large format products to actually sit in their warehouse. So there's a huge bottleneck that we expect will occur just in getting the products distributed and it's one of the reasons why the Ontario government has begun looking at private sector alternatives for wholesaling.

And the Quebec government has put tremendous restrictions on the availability of products just simply because they don't have the space and then there's a distribution challenge in actually getting the products from the wholesaler to the retailers, and having enough space in the retail environments to be able to support this new category of beverages -- which you know are much bigger in size than a small container of cannabis.

You know a single serving can be a relatively large item and that's heavy. And it's made out of glass or can and aluminium and it's filled with liquid so having the locations, having the distribution, the throughput, the logistics.

The handling all of those things seem to have been you know a bit of an afterthought as it comes to the creation of this aspect of the market and it's a real deficiency on the part of the central planning committee that put this together because beverages are really the most socially acceptable and the healthiest way to consume cannabis.

You know we're seeing already the issues in the vaping world especially in the black market sector and almost exclusively in the black market sector where improper ingredients, literally what one would consider to be food ingredients are put into something that you're inhaling and your lungs have no digestive capacity. So there's no ability for your lungs to actually digest food type products such as the vitamin E acetate.

And the bubble-gum flavors and all those kinds of things that they're using. So you know the preparation that was done and the bureaucracy that wants to control the marketplace really didn't take into account a format of beverages and what the expected push will be from major players like the Molson's and Budweiser's and in the constellations of the world to create this new beverage category.

Then the craft producers like us [Hill Street Beverage Company] kind of follow behind them.

JN: So stress is all through the supply chain. Now what about distribution itself?

Well distribution in some markets like Alberta and Saskatchewan is actually pretty much solved so the systems are working and you have Alberta with you know about 1/3 of a population of Ontario outselling Ontario in terms of cannabis revenues just simply because they sorted out/figured out the distribution and they pretty much let the same people that handle alcohol handle the cannabis marketplace.

And they treated it the same way. They went with the private retail model, the private sector, and they have a government wholesaler. [The AGLC] who’s handling alcohol is now handling cannabis. So they kind of set themselves up for success from day one.

You know and I think Ontario and Quebec and some of the other provinces could learn a similar lesson. I think Nova Scotia has it pretty well figured out, with the cannabis stores…you know literally co-located with the liquor stores. So they're definitely prepared to be able to handle the format and size and the logistics of the beverage market.

It's a real sort of hit and miss as you go across the country is to just how prepared the government wholesalers are and certainly you know where they leaned more on the private sector they'd certainly had greater success in converting the legacy market [cannabis black market] into a legal market.

And with generating greater revenues and acquiring greater market share now how are the new rules going to work with regard to actual to retail sales themselves? Well you know there's still some questions.

As you know, in the dispensaries in Canada you know they have to take…they can't have cannabis on display it's all going to be in a vault. And that kind of harkens back to the old days in Ontario [government alcohol sales], where you know even many of the beer stores in Ontario are still the same way. Where you go up to a counter you place an order you don't get to see any of any product until it's delivered to you.

So you have literally no idea what's in stock, you have no idea what products are on the shelf. And so if you're looking to go to a store where you can browse and where you can see what's on display and you can you know look at the merchandise and determine which might appeal most to you for your particular personality and your preferences you have no ability to really do that.

We're not even sure if the beverages will be allowed to be in a refrigerator if they'll have to be taken out of their refrigerator every night and put back in the vault in the back room and then brought out every morning.

So there's some still some complexity that we don't have answers for as yet but you know like any new market any new thing it's a massive undertaking they'll be stumbles along the way.

We're just you know expecting these things will sort themselves out in time and of course in today's instantaneous world…the media are very impatient and the consumer is very impatient and so you know it will sort out, but I think no one will be happy to start.

JN: Now exactly what is Health Canada's saying with regard to the volume limits for consumer sales?

TD: I'm glad you brought that up because there are very strong limits on how much cannabis one can actually possess at one time.

And in fact it went right up to the Supreme Court and they kind of shot down at the Supreme Court for a medical cannabis patient that this person was able to hold a kilogram of cannabis on their person so that they had sufficient cannabis to meet their needs as a medical patient.

So the volume limits we expect will change but at this moment in time as it relates to beverages it's tremendously complex. And it really has no relationship to kind of real-world product formats…It makes no sense from you know what I would call the strength of the product or the amount of THC that's in a particular product.

Right now, if the product is a beverage such as a bottle of wine or a beer or a cocktail or a juice and water that beverage can only have 10 milligrams of THC per selling unit. So a selling unit could be an individual can but…if you take that can and you put a plastic ring around and make it as four pack, or a six pack, as is often the case with craft beer selling in four packs.

Traditionally the smaller cans sell in six packs suddenly that six pack can now only contain 10 milligrams of THC or the four pack can contain 10 milligrams of THC.

So the second thing is that tinctures are also considered a liquid and the legal limit on carrying infused liquids is 2.1 liters. So if you're buying a tincture bottle in a 50 milliliter bottle [that] could have 1,000 milligrams of THC.

Whereas a [cannabis-infused] beverage can only have 10.

But you're able to carry 2.1 liters of a liquid so therefore you could carry 42,000 milligrams of THC by having 42 [times] 50 ml bottles in 2.1 liters of liquid. So 42,000 milligrams of THC is just an insane amount of THC to be able to carry.

But you could only carry -- if you bought 750 ml bottles -- you could only carry two bottles and then you could buy one craft beer and that would get you up to roughly two liters. You could then buy a couple of little 50 ml shot bottles.

You know there's different companies are producing drink “mixers” in little shot bottles, 50 ml bottles.

So you know there's no relationship to what industry standard sizes are. For example, a wine bottle is
750 ml so why wouldn't they make thelimit 2.25 liters so you could buy 3 bottles of wine.

JN: Well let me make sure that I understand this. So you're saying is that the volume limits are very inconsistent between the different categories of product.

TD: Yeah. Yeah.

JN: …and then you're also saying that with respect to infused beverages that the total volume limit is spread amongst the total purchase -- regardless of whether it's single unit or multiple units.

TD: Absolutely. And so if you were if you're going to host a holiday party and you wanted to serve cannabis beverages to your guests for your holiday party if you were going to buy 12 bottles of wine and and 24 beer -- which would be a very common purchase -- for the beer, if they were tall cans you would have to make six trips to the store to buy the beer

And for the wine you would have to also make six more trips because you can only buy two can two bottles of wine at one time.

So it makes really no sense because you know the volume of liquid it's not like you can sit down and drink four or five bottles of wine at one time. You're going to consume that wine over what you would normally consume that volume of liquid.

You'd have four or five servings in a row or at various stages in time maybe you know two with each
meal over the course of a few days.

Yeah, so there's no real connection to real life consumer behavior there's no connection to consumer safety. Because if they said that this was designed in order to “keep consumers safe”, then why can you buy 42 50-ml bottles of tinctures, with a thousand milligrams per bottle, which is 42,000 milligrams THC?

Which is enough to…you think about it: that's 4,200 bottles of [cannabis] wine.

JN: Right. So the rules themselves don't seem to make sense as they stand today. Canada has a volume limit that seems completely arbitrary it will result in a carry limit for cannabis-infused beverages that is as onerous for consumers as it is to beverage producers.

TD: As you know, it's equally confusing because you know they also said that one seed is equivalent to…what the ratio is, but you can carry four plants or four seeds of cannabis which is the equivalent of 30 grams of dried flower.

Right? so you can only carry legally 30 grams of dried flower or four seeds, right, and then those see that then translates to 70 milliliters of liquid so one gram of cannabis is equal to 70 milliliters of liquid but one gram of cannabis could have 250 (equivalent) milligrams of THC

Whereas 70 milliliters of liquid is 1/10 of a bottle of wine where you can only have 10 milligrams in a bottle of wine or one milligram versus you know 250. So there's no connection to the THC count. Which is probably, if you were taking a purely consumer safety focus on creating that the carrying limits for these things, the only thing that would matter to you would be how many milligrams of THC you're allowed to have at one time.

JN: So no consistency at all regarding different product categories. Has Health Canada offered any reasoning behind the rules regarding it these beverages?

TD: None whatsoever.

JN: So it's not a transparent process either?

TD: No. The official response is “we believe we have constructed the regulations the right
way.”

JN: Well let's get to the bottom line. How is this volume limit rule going to impact revenues and sales volumes for cannabis-infused beverages in Canada?

TD: Well I think all of the cannabis beverage companies…I mean when those volume limits came out we completely had to restructure our pro formas and our production and scaling and capacity projections.

We're very much aware of the percentage of beverages that are purchased via e-commerce and we don't think cannabis is really going to be any different.

It's a very small percentage of the e-commerce market beverages represent simply because they're difficult to carry they're heavy they're big they break the cans the beverages freeze in the winter. So you know it's best to sell these kinds of things through the stores.

Until those logistical issues get sorted out…and so you know, from our standpoint we completely recast all of our projections when that came up to kind of scale back to measure what our projections would be on a units per store per week basis

And so we've been very very measured and very prudent in terms of the analysis that we've done. We're really focusing on units per dispensary, where our products exist.

I think that's probably the right way to do it rather than looking at oh I've got a bottling line that can produce five million units a month and I'll sell five million units a month that's got no relationship in
terms of capacity to what consumers will actually purchase -- because the purchase behavior is tied to seeing something on the shelf and making a choice.

JN: So difficult to scale up your operations…?

TD: You need to scale prudently to match the availability of distribution channels. Yeah and certainly you know in Canada the distribution channels are well established..their legal dispensaries.

We know exactly how many stores are open at any given time and it's just a question of working with the store owners to get them to purchase your product and I think if you're on the shelf you'll do well.

The market will likely be still a very significant market. We're expecting very healthy revenues comparatively speaking to our existing alcohol-free business and we know that the projections of a number of the other players that we've come across are healthy.

And relative to the number of stores that exist in the market you know we also think there's going to be a huge effort because as you said earlier, literally billions of dollars have been invested into the cannabis beverage category.

To date, without a penny of returns so far in Canada and those include some of the biggest brands in the world such as Constellation, Budweiser and Molson.

So these giants, beverage giants, will create the category.

That's very different than what's happened in the US and the pricing is very different than what's
happened in the U.S.

We've already seen with Constellation and Canopy. With pricing that they announced just in the last week that they’re pricing those beverage products roughly speaking at the same price as a premium wine or beer or cocktail type product.

That's never happened in the United States. When you walk into a legal dispensary in Las Vegas, if you want to buy a cannabis-infused beer you're gonna pay nine dollars for a beer.

In a retail store now in the US you can walk into a Wegmans in Rochester and buy a case of 30 Yingling which is a great, you know old-school craft beer, in the United States…could buy a case a 30 of those
for 18 bucks.

So you compare 30 Yingling to two beer for the same price when it's cannabis infused. And that's why the US market I believe has never really taken off in beverages: because the the operators in the market have priced their products at an extraordinary premium to the competitive product -- which is alcohol.

Consumers are not going to drink more beverages. So if you drink alcohol you're not gonna drink alcohol plus cannabis. You're gonna take what you used to drink in alcohol and switch it to a cannabis product.

So when you're searching for that, because your body can only take so much liquid…so much volume of liquid to be consumed…if you're a guy who normally drinks three beer and you're done your and you decide to add cannabis to your repertoire you'll probably drink three cannabis beer.

And you'll be done because you're just not going to be used to drinking more volume than that. So those are the two governors that we've seen.

I think the Canadian marketplace is going to be priced competitively too, to where alcoholic beverages are – and provide a real alternative for consumers.

Then there'll be a huge push because you've got these billion dollar brands that have made billion dollar investments. And they're gonna need to see consumers flock to the category to get a return.

JN: So in Canada these next-generation cannabis infused beverages are already ready to compete with the alcohol market today?

TD: Absolutely.

JN: The message is simple: contact your elected representatives and voice your support for more rational rules for cannabis infused beverages.

TD: Absolutely. And we hope that the Beverage Producers Alliance will continue to speak on behalf of the Producers. And hopefully one day we get the resources as an association, through the support of our members, to actually do more consumer education so that we can educate consumers about the benefits of this new category that's been created.

I mean the products themselves. Because we don't have alcohol…the intoxicants, sugar…it's laden with calories whereas cannabis has zero calories.

So you can create alternatives that are dramatically fewer calories. There's no hangover. There's almost no ability to over-consume.

Certainly, with alcohol you can get alcohol-poisoning and die, whereas with cannabis
there's never been a recorded death from cannabis consumption.

So it's a far safer intoxicant to be able to consume.

Then with the technology that we've seen and certainly with with our technology…with Hill Street, how the intoxication only lasts about 90 minutes to two hours.

And it's very linear. So it's literally about 90 minutes from the time you've finished your last drink you're sober again.

So if you have three or four or five beverages in a row at the end of it 90 minutes later you're sober again. Whereas with alcohol it takes you know many hours. The more alcohol you consume…it takes many, many hours for that alcohol to work its way out of your system.

Just why you get a hangover. So there's you know no hangover [with cannabis-infused beverages].
A lot fewer calories. No toxicity.

So we think there's a lot of benefits to these products that that consumers will hopefully learn about and be able to take advantage of.

JN: Well thank you for that elaborate description. Let's wrap things up is running out of time for today.

It's estimated that Cannabis 2.0 will draw 3 million new consumers to the legal cannabis market in Canada. Many will be interested in purchasing cannabis-infused beverages. However, as the rules stand today those consumers will be spending nearly as much time shopping for these beverages as they do in consuming them.

I'm Jeff Nielson senior editor for The Seed Investor and we've been talking cannabis-infused beverages with Terry Donnelly, Co-Founder of the Cannabis Beverage Producers Alliance. Thanks again for joining me today, Terry!

TD: Pleasure. thanks Jeff

JN: For our audience, always engage in full due diligence before making your investment
decisions and best of luck with your cannabis investing!
 
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