Since the launch of the "cannabis 2.0" derivatives market in Canada in 2019, many investors have been anxiously awaiting infused beverages to start rolling out. For many of the products that have been launched, investors are concerned about government regulations.
As of now, consumers are only allowed to purchase 30 grams of dried cannabis at a time. That also includes how derivative products are made. For example, Canopy Growth (CGC) produces a 355ml drink with approximately two milligrams of THC per serving. Under Health Canada's regulations, each container equals 5.1 grams of dried cannabis, which means that consumers can only purchase five cans at a time.
In my opinion, the Federal government's rules regarding limiting sales of cannabis-infused beverages will have adverse effects on the market and will push consumers towards higher potency drinks. This could potentially force novice consumers or, as some call the "canna-curious" to consume beverages far too strong for their liking. This is the exact opposite of what Health Canada wants. There should be regulations specific to infused beverages or treat them more like alcohol.
On the other hand, CGC's most potent drink has 10 milligrams of THC per serving and comes in a 222ml can. That equals 3.2 grams of dried flower, which allows consumers to purchase up to 9 at one time. Aurora Cannabis (ACB), on the other hand, recently launched an even smaller "citrus shot," which resembles the same size as a5-hour ENERGY drink. The shot contains up to 10 milligrams of THC per serving, which is relatively potent for a novice consumer.
Based on the 30-gram limit from Health Canada, consumers can purchase 42 of the citrus shots and still be under the purchase limit. The limitations as to what consumers can buy get even more confusing when comparing powdered beverage additives. There is almost no weight to the products. "Whether you compare it to the rest of the cannabis space or compare it to alcohol, it's a flawed concept," said CGC Chief Executive Officer David Klein told Yahoo Finance Canada in an interview.
Before becoming CEO at CGC, Klein worked in the beverage industry for more than a decade at Constellation Brands (STZ). Klein predicts that the Canadian cannabis-infused beverages market will generate $1.3 billion in sales, representing about 5% of the total alcohol and sports drink market. CGC stated that they have already shipped more 500,000 drinks in Canada since its first products started selling this spring.
CGC recently appealed to Health Canada for changes in policy that would allow consumers to buy up to 72 cans in a single transaction. This would drastically balance out the market and give consumers a chance to understand the different beverages.
CGC's Chief Product Officer Rade Kovacevic had some positive remarks regarding the recent regulatory bottlenecks and stated that they would be "solved" in the coming months. Overall, I believe that the company with the greatest selection of drinks should focus on solidifying its position as a leader in Canada's beverage industry. In my opinion, investors should be watching Aurora Cannabis, Canopy Growth, and HEXO Corp. (HEXO) for more updates on their cannabis-infused beverages.
Disclaimer: The author is long ACB
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CGC shares were trading at $16.27 per share on Tuesday afternoon, down $0.07 (-0.43%). Year-to-date, CGC has declined -22.85%, versus a -3.56% rise in the benchmark S&P 500 index during the same period.
About the Author: Aaron Missere
Aaron is an experienced investor who is also the CEO of Departures Capital. His primary focus is on the cannabis industry. He also hosts a weekly show on YouTube about marijuana stocks. Learn more about Aaron’s background, along with links to his most recent articles.
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