Aphria chairman and CEO Irwin Simon believes that beverages will become one of the biggest segments in the cannabis industry once adult-use marijuana is federally legalized in the U.S.
In a conversation with THCnet, Simon explained his bullishness on the cannabis-infused drinks segment and shared why his company agreed to acquire Atlanta-based craft beer maker Sweetwater Brewing for $300 million – a deal that caught those in both the beer and cannabis industries by surprise.
Major alcohol players like Anheuser-Busch InBev (Tilray), Constellation Brands (Canopy Growth), and Molson Coors (Hexo) have made significant investments into Canadian cannabis firms, while companies like Heineken-owned Lagunitas (Hi-Fi Hops) and Pabst Brewing (Pabst Labs) have also dipped their toes into the cannabis drinks space with partnerships and licensing deals.
However, it is believed that Aphria’s deal to acquire a U.S. craft beer company is a first of its kind -- one that brings a U.S. alcohol manufacturer and a Canadian cannabis firm together under one roof.
Though unique, the partnership represents a natural evolution of Aphria’s business model, according to Simon.
“We have always considered ourselves as a CPG company with a focus around building our consumer brands like any company that sells baking mixes or snack brands,” he said.
And now that Aphria has access to a profitable beer company with years of brewing expertise, as well as valuable cannabis-themed brands like 420 Extra Pale Ale, Hydroponics Seltzer, and its G13 IPA infused with terpenes, Simon believes there’s reason to be bullish on the future of cannabis-infused beverages.
“I am betting that it will be as big as White Claw and Truly,” he said.
That probably seems hard to imagine now, and for good reason. Sales of hard seltzer – which currently make up roughly 10% of total U.S. “beer” volume -- topped $3.3 billion through the first 9.5 months of 2020. Analysts at Credit Suisse estimate the category will grow to account for 25% of total beer volume by 2025.
If that forecast proves accurate, our back-of-the-envelope calculation puts the hard seltzer category somewhere north of $10 billion by 2025.
But sales of cannabis drinks in the U.S. are nowhere near that at the moment.
While several emerging CBD-infused drinks companies like Mad Tasty and Recess are beginning to build a category of hemp-derived beverage offerings that can be sold at mainstream retail outlets, the market for THC-infused beverages that get consumers high is still nascent.
The largest producer in California, Cann, has raised $5 million from an impressive roster of well-known celebrities, but even that company will only move about 3.5 million units this year.
Other brands like Wunder and Two Roots are also making headway, but without the ability to sell THC-infused drinks at liquor stores and chain outlets, growth potential is limited.
Research firm BDSA predicts that sales of all cannabinoid beverages could reach $1.7 billion by 2024, but CBD-infused offerings will likely make up the biggest chunk of those sales due to their expanded distribution opportunities.
Nevertheless, Simon remains optimistic.
“If any category is going to get into THC, I believe it will be beverage companies and ultimately the different liquor boards can regulate that,” he said, noting that he envisions a future where lose-dose THC-infused drinks are sold at traditional retail stores.
Simon said he also believes cannabis drinks are healthier for consumers, pointing to the fact that they often contain fewer calories than a typical beer and do not cause hangovers.
While that may be true, not everyone is bought in to the potential market opportunity for cannabis drinks.
Brent Williams, the founder of investment management firm Highwater Financial, told THCnet that he doesn’t believe THC-infused beverages will be a “significant portion” of the U.S. cannabis segment.
“If you look at some of the more mature markets, cannabis beverages account for 5% and below of total sales,” he said of states like California, Colorado, Oregon and Washington. “It is also one of the slower growing product categories. The sales within the industry today don’t back up the insane amount of bullishness that’s behind it.”
However, part of the reason why cannabis drinks lack the kind of market penetration needed for investors like Williams to get excited is that the current supply chain is not designed to support a robust beverage business: Dispensaries aren’t outfitted with coolers and storage space, and distributors aren’t well-equipped to deliver heavy drinks.
That’s prevented both emerging and established players from investing heavily into building the drinks category within the dispensary channel, especially as the possibility of selling at mainstream retail looms on the horizon.
That will change in 2021, when Canada's Canopy Growth Corporation launches its cannabis-infused beverages in the U.S. via a partnership with New York's Acreage Holdings.
That move is aimed at helping Canopy develop a leading position in the THC-infused drinks market ahead of any loosening of federal cannabis laws, which would trigger its agreement to acquire Acreage.
Even if that happens, Williams isn't convinced that growth is guaranteed.
"It's going to be a very, very long time until you can sell cannabis beverages outside of the dispensary," he said. "It will take years even after cannabis is legalized."
For his part, Simon said he’s ready for any and all outcomes – including one where cannabis isn’t immediately legalized at the federal level and the company is restricted to selling only hemp-derived beverages in the U.S.
“We bought this business because it is a great craft beer business first,” he said. “We bought this business because it has a great brand name. We bought this business because it gets us into the U.S. market. And we bought this business because we got an excellent management team that can help us in the beverage business. There is still a lot more that will play out here. And when cannabis is legalized, we will be ready.”
Indeed, once the acquisition is complete, Aphria will own the 14th largest craft brewery in the U.S. and have access to distributors in 27 states. It will also be able to bring the 420 brand to Canada, where Simon said there is a "very big possibility" that Sweetwater-branded drinks and other cannabis products could be made.
"In Canada, where it is legal, we could use the Sweetwater or 420 brand to develop and sell THC-infused drinks," he said, adding that there is "no reason" there can’t also be 420-branded edibles.
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