Credit: Paul Joseph Jeff Donnelly at one of his Hobo Recreational Cannabis shops. Although he’s dealt with liquor regulations for 20 years, the Donnelly Group owner found it surprisingly difficult to get a cannabis licence

Should B.C.’s alcohol industry be worried?

In October, the federal government will celebrate a year of recreational cannabis becoming legal. There’s no word on how Prime Minister Justin Trudeau and company plan to mark the occasion. (Or if Trudeau will be in office long enough to enjoy the day.)

A year later, the only real differences for those who consume the drug recreationally are that they can get it in nice, government-approved wrapping and (ostensibly) don’t have to make small talk with scraggly dealers or hide in public. How people actually use marijuana hasn’t changed much.

But they’ll have more options in December, when cannabis edibles and drinks become fair play for licensed stores. Although edibles have been available on the black and so-called grey markets for some time, cannabis-infused drinks are something of an unknown. The rules that will govern them seem just as cloudy.

“I’m concerned, because we actually don’t have much information about how these new regulations are going to hit the ground here,” says Vancouver Mayor Kennedy Stewart.

Although some rules around the pot-infused beverages have come to light, most of them have to do with production and marketing. Manufacturers won’t be able to promote drinks with colourful imagery or packaging, for example, or use terms that are synonymous with beer, wine and spirits. They’re also forbidden from adding alcohol, caffeine or nicotine, and there’s a limit of 10 milli-grams of tetrahydrocannabinol (THC), the chemical that produces a cannabis high.

And only licensed cannabis retailers will be able to sell THC goods, so forget buying them in bars and restaurants—at least for the foreseeable future.

But there’s no real clarity on where you’ll be able to enjoy the beverages, which makes Stewart nervous. “If, for example, someone opens a cannabis store on Denman Street, and has an ability to sell edibles and drinkable products, these products are regulated like cannabis and not like alcohol,” he says. “So you’re able to buy your cannabis drinks at the store on Denman and walk down to English Bay and drink them right in front of the Cactus Club. But you can’t go into the Cactus Club and buy a beer and go out on the beach and drink it."

Dan Sutton, founder and managing director of Tantalus Labs, at his Maple Ridge facility

Joint ventures

It makes sense, then, that beverage companies are lining up to partner with cannabis enterprises, seeking to use their existing infrastructure to hit what projects to be a burgeoning, untapped market.

Constellation Brands, the New York–based producer of Corona beer, invested $5 billion for a 38-percent stake in Ontario weed giant Canopy Growth Corp., while Molson Coors Canada paired up with Quebec’s Hexo Corp. to launch Truss, a line of pot drinks. B.C.-based licensed producer Tilray has partnered with Budweiser producer Anheuser-Busch InBev to research the market in Canada, with each company reportedly contributing $50 million to the venture.

“I guess the question is, what would you give for the opportunity to invest in one of the first five breweries ever in Canada?” asks Dan Sutton, founder of Vancouver-headquartered cannabis producer Tantalus Labs, which runs a 75,000-square-foot state-of-the-art facility in Maple Ridge.

In the spring, Tantalus announced a letter of intent to produce cannabis beverages with Craft Collective Beerworks, a Vancouver-based contract brewing operation that has relationships with well-known brands like Postmark Brewing and Doan’s Craft Beer Co.

“In the cannabis beverage market, we’re anticipating a future need. The market is exactly zero today,” Sutton says. “There’s no explicit need for this product right now. It’s kind of like Henry Ford said: ‘If I had asked people what they wanted, they would have said a faster horse.’ That analogy rings true in this situation, because it’s hard to envision a product mix that hasn’t been executed on.”

Cannabis drinks are legal in some U.S. states, but they haven’t permeated the market like many were expecting. Sutton believes that over time, there’ll be some real growth: “I think it’ll take several years to shape up. But as products succeed, as market entrants prove their viability, we’ll see more and more. You can add cannabis to a wide variety of beverages to make them more interesting. I’ve seen pitches on non-alcoholic beer, kombucha, tea—a whole host of products.”

Of course, there’s no way to get exact numbers at this point, but everyone and their uncle have taken aim at guessing how lucrative cannabis drinks could be. Arcview Market Research, a California firm that collects data on the cannabis industry, estimates that the edibles market in the U.S. and Canada could top US$4.1 billion by 2022. And on a February conference call with analysts, Molson Coors Brewing Co. president and CEO Mark Hunter predicted that the Canadian cannabis drinks market would eventually be worth—at the very least—$1.5 billion.

Paul Meehan of Goodridge & Williams Distilling isn’t sure there will be a market for cannabis beverages

Blowing smoke?

Some are more skeptical about what the market might bear, though. Paul Meehan is the owner of Goodridge & Williams Distilling, which produces spirits and mixed drinks like the popular Nütrl Vodka Soda out of its Delta facility. He’s also the largest shareholder of a beverage called Centr, for which he does brand work and whose CEO is his brother Joe.

But Centr, which hit the U.S. in June, uses hemp, not cannabis—instead of providing users with the psychoactive effects of THC, it’s heavy on cannabidiol (CBD), a natural remedy for things like chronic pain and anxiety.

“I don’t think it’ll be as gear-changing as people expect,” Meehan says of the cannabis beverage market. “The companies that are going to do well are going to make products that are needed. If you look at the success of Nütrl Vodka Soda, that was based around the simple insight that beer is heavy. There was a need for something that didn’t fill you up and was low-calorie, no-carb.”

Meehan, who oversees about 60 employees between Goodridge & Williams and a Vancouver-based marketing firm he owns, doesn’t think that same market need is there for cannabis drinks. “My philosophy is that when people drink THC, it’ll be high-quality microdosing—the 50-millilitre shots or additives—versus lifestyle brands that don’t look like lifestyle brands. Whereas I’m a fan of what CBD does: it actually literally gives you that little bit of calm. We want people to think, as Red Bull is to wind up, Centr is to wind down.”

Setting up shop

But even if some liquor industry players aren’t sure how cannabis drinks will infiltrate the market, it’s probably not worth sitting on the sidelines to find out, especially in this province.

The United Nations’ World Drug Report 2019 found that nearly 23.5 percent of B.C. residents 15 and older reported using the drug in 2017. That number was 15 percent in Alberta, 14 percent in Ontario and 11 percent in Quebec (the lowest in the country). The closest runner-up was Nova Scotia, where almost 19 percent of residents 15 and up reported having consumed cannabis that year.

Jeff Donnelly thinks any big effects on the alcohol industry are at least several years away. But he figured that the company of pubs, restaurants and barbershops he’s president of, Donnelly Group, might as well enter the cannabis game.

“We’ve been dealing with the government and the same regulatory bodies for so many years, so it was kind of an easy transition for us,” says Donnelly, who’s expecting to have eight Hobo Recreational Cannabis outlets open across the country this fall, including four or five in B.C., which already has two. “Because once you’re dealing with the Liquor and Cannabis Regulation Branch, as it’s called now, and you kind of weave through the bureaucracy for so many years, we just thought that with those relationships it would be something where we’ve done all the work.”

But that doesn’t mean the procedure was painless, even for a company that has 20 locations in Vancouver and Toronto and is in its 20th year of business.

“The process was terrible; it was so much red tape,” Donnelly recalls. “I thought it might be easier for us. It was months and months and months. And paperwork. I’ve told people it’s probably about 10 times harder to get a licence to retail cannabis than it is to get a licence to open a restaurant or a bar.”

Hobo is well positioned as one of the few regulated cannabis retailers in B.C., especially while the government is forcing grey-market stores to close. But Donnelly isn’t sure how much impact cannabis drinks will have when they’re legalized, especially because they can’t be sold in bars or restaurants. It’s also unclear if or when that day will ever come.

“Eventually they’re just going to say, Oh, these drinks aren’t hurting anybody, let’s just put them in bars,” Donnelly speculates. “But the background checks and the red tape we went through to get a licence to retail this stuff, even though we have to buy it off the government, was absolutely incredible. I’m talking tens and tens of thousands of dollars and close to a year to get a licence.

“So how are restaurants supposed to go through that process with cannabis-infused beverages? I don’t see it. I don’t know how it’s going to happen, but I think one day a switch is going to flip and they’re just going to say, OK, let’s sell this.”

The pains of opening a cannabis shop in B.C. are very real for Andrew Gordon, senior vice-president of Vancouver-based Kiaro, a retailer that launched two stores in Saskatchewan earlier this year. A third—a 3,000-square-foot operation at Kingsway and Knight Street in Vancouver—finally opened in early August.

We’re curating it right now,” Gordon says over the phone from a Gastown coffee shop. “We’re getting all of our suppliers in line so we can merchandise them right to add value to the consumer experience.”

Gordon, who uses cannabis for post-traumatic stress disorder, is a firm believer in the product, especially as an alternative to alcohol. “When you look at the research, the main drivers behind both alcohol and cannabis drinks are very similar—they reduce stress and anxiety, help you have fun with friends, improve your mood,” he says. “But the nice thing about cannabis drinks is they’re a heck of a lot more beneficial for you from a health perspective than alcohol is. [Alcohol] has an impact on our health system to the tune of over $10 billion a year.”

Mitigating that is part of Gordon’s mission, and he thinks the public will get on board. “Studies have shown that one in three Canadians are looking at engaging with cannabis beverages as an alternative to alcohol,” he says. “Getting people comfortable with the idea of making a switch, at least for part of the week, is key.”

Of course, assertions like that are bound to ruffle some feathers in the alcohol trade. Vancouver Mayor Stewart isn’t among those players, but he’s determined to protect one of his city’s busiest sectors. “We’re the mecca for craft breweries in Canada, and I just want to help this industry as much as possible,” he says. “I wouldn’t want to see [the breweries] negatively impacted.”

Although not every B.C. cannabis retailer might want to take on the liquor business, there could be a battle on the horizon. Stewart agrees with that assessment: “I feel like the consumables coming on in December could lead to conflict between the two sectors rather than cooperation.”

Tantalus Labs’ Sutton is a bit more undecided. “There will be many people in Canada who have not experienced a product like this and have not experienced what it can elicit, that will take to it, and some people that don’t, and that’s totally fine,” he says. “You just create an awesome product and let people experience it on their own. But personally, I’m very excited to crack the first one.”

Says Kiaro’s Gordon with a chuckle: “The market is thirsty for it.”

Changing habits

5.3 million

Canadians who reported using cannabis in the first three months of 2019

646,000

Number who tried it for the first time during those months

2/1

Difference between male (22% of those surveyed) and female (13%) use of cannabis during those months

$529 million

Annual Canadian market opportunity for cannabis-infused beverages, according to a recent Deloitte report

37%

Likely Canadian cannabis users who plan to try it in beverage form

59%

Likely users who plan to try it in edibles

24%/35%

Share of current and likely Canadian users who see cannabis-infused drinks as an alternative to alcohol

Source: Nurturing new growth: Canada gets ready for Cannabis 2.0, Deloitte; Statistics Canada