Dive Brief:

Arizona Beverages and Dixie Brands, a Denver-based cannabis company, entered into a partnership last Friday for the production, distribution and sale of marijuana-infused products containing THC.

While there are no definitive product plans yet, officials said the partnership will develop a line of vape pens and gummies before beverages, The Wall Street Journal reported, which will first launch in the U.S., followed by Canada and Latin America.

A definitive agreement, expected within 45 days, will give Arizona a stake of up to $10 million in the weed company.

Dive Insight:

Ask someone what’s trendy in the food and beverage space and the word “cannabis” is likely not far from their lips. With such buzz around the ingredient — Euromonitor is forecasting that it will become the next big functional ingredient — it’s no wonder Arizona Beverages is the latest company to get into the game.

What's different, however, is that the New York-based tea company is licensing its name to Dixie to produce and distribute THC-infused products in dispensaries in states where cannabis is legal.

The primary market for THC and CBD-infused food products is in the alcoholic drink space, according to a study by Euromonitor. Many brewers are beginning to partner with cannabis companies to bring weed brews to North America. In 2017, Corona beer maker Constellation Brands announced a nearly 10% stake in Canopy Growth Corporation, the world’s largest publicly traded cannabis company, and increased that investment last year by $4 billion. Molson Coors Brewing, which has a controlling interest in HEXO, formerly known as Hydropothecary, is working to develop nonalcoholic, cannabis-infused beverages for the Canadian market. In December, Tilray entered into a joint venture worth $100 million with AB InBev to develop nonalcoholic drinks with CBD and THC.

Nevertheless, Euromonitor noted that soft drinks seem to be the next logical front for CBD to grow into. Though Arizona iced tea is not a soft drink, it is often sold alongside them and is widely found at Walgreens and Walmart, signaling that if the partnership is successful, the trend may be moving into the mainstream in a big way.

The association of cannabis with a nonalcoholic drink will likely be beneficial for Dixie and Arizona once they start developing beverages. A study from A.T. Kearney showed that 30% of Americans are willing to try a cannabis-infused nonalcoholic beverage. The success of Keef sodas, which are distributed in California, Colorado, Arizona, Nevada, Michigan and Puerto Rico, demonstrates the potential demand.

Arizona Beverages is a privately owned company that is not beholden to shareholders; thus, it may have more leeway for experimentation in the market. Licensing its name, however, could be potentially risky for the tea company as it will not be the producer of the final products and instead only have its name emblazoned on the packaging.

Even if the company doesn't serve investors, it still has to be profitable. That may be one reason behind the licensing deal. Iced tea sales for Arizona continue to slip from 23.4% in 2013 to 16.2% last year, according to Euromonitor International and reported by The Wall Street Journal. Despite leading in sales volume in the U.S., Arizona has been dethroned by Pure Leaf as the top ready-to-drink tea in terms of sales dollars.

A joint venture into the cannabis market seems like the logical next step for a company looking to expand. The global cannabis market is valued at $150 billion today, and legal sales are expected to grow to 77% of the total global market by 2025, Euromonitor reports. With Congress talking more about legalizing the substance, Arizona is not alone in placing its bet to make a little green.