SPECIAL REPORT: Hemp-derived CBD… ‘We're operating in a constrained addressable market with a patchwork of state-based regulations’
For some brands attempting to wade through the minefield, the frustration is palpable: “After 20+ years as a beverage entrepreneur,” notes natural products veteran Eric Schnell, “this one is one of the greatest false starts I have ever been a part of. Everyone’s bets did not pan out at all the way they believed.”
For others, such as West Hollywood-based functional beverage brand VYBES, state-level authorizations for hemp-derived CBD products have been a gamechanger, frustrating though the lack of clarity at a federal level continues to be, says founder Jonathan Eppers, who has also developed a line of sparkling tonics without CBD (featuring other on-trend ingredients such as ashwagandha and ginseng).
“2022 is shaping up to be our best year of sales on our CBD beverages since I started VYBES in 2018,” claims Eppers, who notes that Wegmans and Sprouts have both launched CBD beverage sets. “Consumer demand hasn't slowed down, and if anything, it's picking up both at retail and online.”
VYBES: ‘We're seeing more and more big chain natural retailers getting into the category’
He added: “California's passage of AB45 really opened up the market in our home state. Since AB45 passed, we launched in San Diego with the largest DSD in the market, expanded into hundreds of new stores across California including Bristol Farms, Lazy Acres, Mothers & Nuggets, and Wegmans is launching VYBES in its new CBD set this month, which is a real endorsement of the category. GoPuff launched VYBES in NYC and is launching us nationwide over the coming weeks.
“We're seeing more and more big chain natural retailers getting into the category, and I expect that momentum to continue into next year. However, I don't see Target, Walmart, and big box retailers like them getting into CBD without federal clarity on foods and beverages, but grocery chains who operate in legal states are getting in and launching CBD drink sets, and I believe will continue to over the coming months.”
He added: “Someday soon, I'll be able to go into a Walmart and buy a CBD drink; but for that to happen, I do believe Congress will need to clarify that CBD is legal in foods and beverages, because I don't expect that to come from the FDA.”
Recess: ‘You're operating in a constrained addressable market with a patchwork of state-based regulations’
Ben Witte, founder and CEO at functional beverage brand Recess (tagline: ‘We canned a feeling’) has been clear from the start that he is “building a brand, not marketing an ingredient,” is seeing success with CBD-infused products in some markets but has also built a growing business with Recess Mood (sparkling water infused with magnesium and adaptogens).
“We see both product lines coexisting, and we do see a lot of momentum on the CBD side of the business," said Witte. "We now have 24 states that have passed state-based regulations of some kind [permitting the sale of CBD-infused foods or supplements] and that is causing some mainstream retailers like Sprouts and Wegmans to build out the category.
“Large alcohol distributors like Southern Glazer's, Breakthru Beverage Group and RNDC have gotten into the space over the past year, but it’s definitely an unusual business situation to navigate because you're operating in a constrained addressable market with a patchwork of state-based regulations and I do think you will see a lot of brands not be able to make it to the other side, and I think we're still some time away from Target, Whole foods or Walmart from carrying CBD beverages.”
“Mental wellbeing and alcohol moderation is the next phase of the better for you movement and CBD will be one of many functional ingredients that is used in products that meet that consumer need.” Ben Witte, founder and CEO, Recess
‘Interest in the proposition that CBD offers – helping people feel calm and balanced and relaxed – is only accelerating’
Asked about the challenges of selling premium beverages to consumers with constrained budgets in a period of rampant inflation, beverages such as Recess “are not competing with LaCroix,” points out Witte.
“When people drink a can of Recess they're drinking it instead of alcohol or cold brew coffee or kombucha, and interest in the proposition that CBD offers – helping people feel calm and balanced and relaxed – is only accelerating, if anything.”
‘There was this kind of Gold Rush mentality and everyone became a hemp farmer and a CBD extractor’
So what is happening on the supply side?
When the 2018 Farm Bill passed, which removed industrial hemp from Schedule I of the Controlled Substances Act but did not suddenly make CBD and other cannabinoids legal in foods, beverages and supplements, “there was this kind of Gold Rush mentality and everyone became a hemp farmer and a CBD extractor,” says Witte.
“And basically the supply got ahead of the retail addressable market and prices came down.”
HempRise: ‘Pricing has definitely eroded, but it is not inhibiting our ability to grow in the market’
But while prices of hemp biomass and hemp extracts and isolates dropped precipitously, Layn subsidiary HempRise – which invested $80m into a state-of-the-art hemp processing facility in Jeffersonville Indiana that opened in June – insists it is not sitting on a white elephant.
CBD-infused foods and beverages are not on shelf at every major retailer from Walmart to Kroger, concedes VP Sales Kyle Einhorn. But with multiple states now explicitly permitting the sale of CBD-infused foods, beverages, and supplements, there is still a sizeable addressable market, he says.
“It's no secret there's been an oversupply and massive price correction, so yes, pricing has definitely eroded, but it is not inhibiting our ability to grow in the market. We built this business to be ready at scale when the big players can enter.”
That said, flexibility was built into the design of the facility from the get-go, he says. “It was designed as a botanical extract facility, and we happen to be using it for hemp extracts, but we can extract whatever we’d like to in this facility.”
‘Beverage is definitely one of the one of the key areas of opportunity’
HempRise – which produces broad-spectrum* hemp distillates (ideal for soft gels, tinctures etc), water-dispersible CBD powders ideal for stickpacks consumers can add to beverages, CBD nano-emulsions for ready-to-drink beverages, and CBD isolates (more popular for topical products), is seeing interest from companies in nutraceuticals, pet products, personal care, foods, beverages, and supplements, says Einhorn.
“A few years ago, the only way to get CBD was through tinctures, but the market is going to continue to evolve and beverage is definitely one of the key areas of opportunity.”
While the lack of regulation at a federal level means that there are still unscrupulous players in the market, responsible companies are looking for suppliers that can deliver high-quality, consistent products that have been tested for contaminants, mold, solvents, pesticides, and heavy metals, and contain what is claimed on the label, whether it’s a given amount of CBD or other cannabinoids, or the absence of detectible THC, he says.
“We also have an in-house innovation center at the facility in Jeffersonville and we really pride ourselves in being that go-to company that companies can come to, to help them on formulation, and with information on the regulatory side.”
Big brands: ‘There’s a wait and see attitude’
So what kinds of companies is HempRise dealing with?
Owing to the regulatory impasse at a federal level, many of the biggest players in the supplement space have done the R&D work and sampled ingredients from HempRise, but are “in a holding pattern right now,” adds Collette Kakuk, VP of global marketing.
On the food and beverage side, meanwhile, “there’s a wait and see attitude… what we're seeing is mostly contract packaging companies showing interest,” says Einhorn, who says large CPG brands would likely use a co-packer in the first instance rather than produce CBD products in-house.
“But there’s no question that they want to get into this business and you already see some larger brands like Pabst Blue Ribbon getting into the space [with a THC-infused ‘High Seltzer’].”
US Hemp Roundtable: ‘We’re very bullish about the long term, the question is always how quickly is this going to happen?’
Jonathan Miller, general counsel for the industry-backed US Hemp Roundtable (which counts among its member beverage brands such as Recess and VYBES and supplement brands including Charlotte’s Web and CV Sciences) says he’s optimistic that there will be some movement at a federal level as we gear up to the 2023 Farm Bill: “Really our focus is on Capitol Hill. We’re very bullish about the long term, the question is always how quickly is this going to happen?”
In the meantime, he says, even though industrial hemp is not a controlled substance, there is still “a lot of confusion out there, and brands are struggling with financial transactions, dealing with social media, trademarks and then every state has a different regulatory regime, and so we need to get [federal] legislation passed.”
He added: “A lot of folks have crashed and burned, but there are a number of companies that have weathered the storm and while there are challenges, I think the beverage industry is where the greatest growth may come from.”
*HempRise defines broad spectrum as 80-85% CBD with the balance coming from minor cannabinoids, with a non-detectable level of THC.