Tapping the Booze Business

May, 2018

Tapping the Booze Business

Hemp, CBD and extraction companies can crack the infused alcoholic beverage market but must navigate a regulatory thicket

By Vicky Uhland

When Prohibition was repealed in 1933, small, local brewers and distillers were the first to get back into the alcohol business. Many either grew into national brands or were snapped up by larger companies looking to expand.

Today, the same scenario is occurring with beer, wine and spirits infused with hempseed oil, cannabidiol or cannabis terpenes. Colorado-based New Belgium Brewing, for example, recently unveiled a hemp beer, while California-based Lagunitas Brewing last year offered a brew infused with cannabis terpenes.

“We’re in a unique moment in time. There are no big hemp or CBD alcohol brands yet, so there’s a window – maybe for the next three to five years – to establish a brand,” said Smoke Wallin, chief marketing officer and president of distribution for Vertical, a company in Agoura Hills, California, that is developing a CBD oil that can be infused into alcohol.

Some big companies are wasting no time, especially with Canada poised to legalize recreational marijuana. Last October, New York-based Constellation Brands, which distributes more than 80 wine, beer and spirits brands, paid $190 million (CA$245 million) for a 9.9% stake in Canadian cannabis cultivator Canopy Growth Corp. Wallin and others believe more large beverage companies will follow.

 

Smoke Wallin, former WSWA Chairman and President of Vertical Companies

 

“I’m absolutely certain the Anheuser-Busches, the Bacardis, the Jack Daniel’s are going to get into this, but they will wait until marijuana is fully legal to do it,” said Wallin, who has more than 25 years of experience in the alcoholic beverage business. “Anyone that can get a brand established in the meantime, and show traction, is going to be very attractive to the big players.”

That translates into business opportunities for hemp growers, CBD producers and companies that extract oils such as cannabis terpenes. Those products don’t carry the same stigma in the United States as THC-laden marijuana, but it won’t be a slam dunk.

The marriage of alcohol and cannabis faces unique regulatory and legal hurdles, making it difficult for hemp, CBD and extraction companies to produce their own booze. The simpler option for those companies is to sell their products to alcoholic beverage manufacturers to get a foothold in what could become a lucrative product niche.

Striking a Partnership

That’s what Joe Pimentel did. In 2017, Pimentel, the owner of Luce Farm in Stockbridge, Vermont, decided to start producing CBD-infused honey to set his farm apart from other area hemp growers. He approached Long Trail Brewing in Bridgewater Corners, Vermont, about carrying the honey in the brewery’s restaurant and gift shop.

“The CBD hemp market is so immature, so our strategy is to align with a lot of Vermont brands that are better known than ours,” Pimentel said.
Long Trail decided not only to sell the honey, but also to make a beer with it. “We liked that the hemp gives us new flavors we can’t get anywhere else,” said Head Brewer Ian Harbage. But the honey played havoc with the beer’s consistency, so the brewers opted for Luce’s CBD extract and hemp terpenes instead.

Terpenes are separated out at the beginning of the hemp-extraction process, like an essential oil, and then the CBD extract remains. Pimentel used to do his own extractions, but “nothing we could create in our kitchen had consistent levels of THC,” he said.

He started researching the best extraction techniques and decided on a carbon dioxide method offered by the PhytoScience Institute in Waterbury, Vermont. PhytoScience now handles all of Luce Farm’s hemp extractions, and the terpenes are consistently documented at less than 1 part per million THC.

CBD has more health properties but not as much flavor and aroma as terpenes. “The main terpenoid in cannabis is the main flavor in hops, which makes terpenes and beer a good partnership,” said Andrew Follett, the owner of Philadelphia-based Keystone Canna Products, which was founded in 2014 to help hemp farmers distribute nationally.

Follett also said CBD, which has a slightly nutty flavor, is a better option for wine and spirits manufacturers that don’t want a distinct cannabis taste or smell in their products. But he noted that it takes time, effort and creativity to mix the oily product into beverages, which can deter some brewers and distillers.

Regulatory Headache

Like the cannabis sector, the alcohol industry faces a web of regulations – in this case from both the states and the feds. Consequently, hemp, CBD and extraction companies must be aware of the complicated regulatory process when wading into the alcohol business.

The U.S. Drug Enforcement Administration’s declaration in December 2016 that CBD is a Schedule I controlled substance – like marijuana and heroin – complicated matters. Last year, a Colorado craft beer producer, Dad & Dude’s Breweria, butted heads with the feds over the brewery’s production of a non-THC, CBD-infused beer. Dad & Dude’s had previously won approval for the brew from the federal Alcohol and Tobacco Tax and Trade Bureau (TTB). The brewery, which continues to sell the beer on its premises, is for now locked in a legal battle with the DEA as well as the agency.

The TTB, meanwhile, presents other hurdles. Any alcohol company that sells across state lines, for example, must secure approval from the agency. Back in 2000, the agency’s predecessor issued requirements covering formulas, processes and labels for domestic hemp products. The policy requires all alcoholic beverages that contain hemp or a hemp component to submit a lab report stating the amount of THC in the hemp, a move that dovetails with the DEA’s policy.

“It follows the DEA’s rules, and the intent of those rules are to ensure the product is THC-free or has trace amounts,” said Ryan Malkin of Malkin Law, a Miami Beach, Florida, firm that specializes in alcohol law.

In December 2017, Weatherford, Texas-based TVM Wines received TTB approval to manufacture and sell its hemp wine across state lines. The process took two years and 28 different paperwork submissions to the agency, said Elease Hill, TVM co-owner and vice president of sales and marketing.

Hill said the key was to supply the agency with lab tests showing the hempseed oil used in her sweet, citrus-based wines had less than 4 parts per million THC, and that the oil was derived from hemp stalks, roots or stems rather than flowers or resin, which is considered a Schedule I substance by the DEA.

“You have to be careful where you get your hempseed oil from,” Hill said. “I had one that was 3% THC, from mature hemp stalks, and the DEA said that was too high, so the oil must be coming from hemp resin.”

Hill found her suppliers through a list provided by the Texas Hemp Industries Association and by simply Googling hempseed oil companies. She read product reviews and then called the companies to check their references and lab work documentation.

Hill eventually partnered with Keystone Canna Products. Its hemp oil and food brand, Cannagenix, specializes in paper trails and lab testing, according to Follett, the owner.

“There are a lot of hemp and CBD products but not a lot of quality documentation,” he said, noting that growers and CBD companies that can’t produce a regulatory paper trail are likely to be shut out of the alcohol business.

Labeling Semantics

Hill said even though TVM’s wines contain CBD, they’re labeled as “hemp seed oil infused” because the TTB and DEA preferred the word “hemp” to “CBD.”

But, like most cannabis law, this is a gray area. The determining factor appears to be where the beer, wine or spirits are sold. Even if alcohol doesn’t cross state lines, regulations vary from state to state, just as they do with cannabis.

So far, Long Trail’s Medicator beer hasn’t run up against the TTB, even though the can says: “Vermont’s first CBD infused beer.” But the company has made only three small batches and has limited sales to the brewery’s pub.

In California, Petaluma-based Lagunitas Brewing uses cannabis terpenes in its SuperCritical Ale. CannaCraft, a vertically integrated medical cannabis producer and distributor in Santa Rosa, California, extracted terpenes for the beer using a carbon dioxide process.

“There is no THC in the beer, so we simply made the beer and did not ask for permission to do that which we do every day,” said Lagunitas founder and Executive Chairman Tony Magee. “However, the TTB became interested, and we are talking with them about it right now. I’m pretty confident they will understand what we intend to do, and we’re looking forward to making a whole lot more of it.”

 

Amazon Prime Now – Disruptive Same Day Delivery Arrives In Indy

Various Blog Post Banners 2015

I have to admit, when I first read about the same day delivery service I was a bit skeptical.   How would it work?  Why would I really want it?  Could anyone really do it at scale on a sustained basis?

Experience:

Well, early this morning I was reading the news on my iPhone and received a message from Amazon that all Prime members now had access to same day delivery (1-2 hours from order) through its new service called Prime Now.   #PRIMENOW   It piqued my interest.  Is this real?  Can they really pull it off?  So I downloaded the Amazon Prime Now app and started browsing.  I was amazed at the breadth of offerings from grocery to sports to electronics and more.  I’ve been in the market for a luggage rack for my truck and found exactly the type I wanted. I knew we were out of eggs and browsing the groceries made me think about breakfast so I added some free range organic eggs and all natural sausages.  Click click click and my order was in process.

They gave me a delivery window of 8-10am (my order was placed around 5:45am).  I received my order exactly as expected at 9am and was able to make breakfast before the rest of my day unfolded.  The driver told me I was among the first 10 orders in Indy.  This was a profoundly positive experience.

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Amazon Prime Now is currently available in Atlanta, Baltimore, Chicago, Dallas, Indianapolis, Manhattan and Miami. The service will continue rolling out to additional cities in 2015

What does this mean?

It is a game changer.  Not immediately, but with a sustained effort, I believe this could drastically change how consumers (and businesses) think about behave with their purchasing.   Home delivery is great and has been around for a long time (think the milkman of old, bottle water delivery etc).  We get deliveries from Amazon and tons of other companies all the time.  Some of these are next day or 2nd day which is super convenient.   We get a weekly grocery delivery of organic and locally grown produce from Green Bean Delivery which is FANTASTIC!  We have to plan our order by Monday at noon and receive our delivery of groceries on Wednesday of each week.

All that said, the idea that one can simply run out of something or decide one “needs” (wants) something, almost anything, and make it so two hours later is different.  This is what 90% of running errands ends up being.  Going to the store for this and that and picking up a few things in between larger shopping trips happens to all of us (or our families) every day. What if we could cut most of that out?  What if you need something you simply think it (a couple of swipes is not much work) and it arrives in about the same time it would take you to go out and shop, pick your items, load your car, drive home, unload your car. This requires a different kind of thinking around what is possible, but I don’t think its a that big of a leap for most of us.

Implications:

For Consumers

  • Time – For no extra cost (driver tip cancels out gas you would have used perhaps), it frees up time.  How much time in a week do we spend running to the store, shopping and returning? 4 hours? 8 hours? More?  What more productive things or fun things can one do with that time.  It is big.
  • Convenience – No need to plan very far ahead, need something, make it appear with no effort.  Wow.

For Small Business

  • Time – Same as above, many small businesses buy things by shopping.  Eliminate that need and do you eliminate a need for headcount manning the store while someone is out buying supplies?
  • Service – out of something? – now you can replenish immediately and provide your customers whatever you were missing in a short time.
  • Investment savings – reduce safety stock/inventory on certain items and replenish each day as needed.  For many small businesses (and large) space to store inventory is a real issue.  What if you could simply replenish as needed?  Though this service is focused on consumers, for many small businesses, it could be a better alternative to traditional distribution or running to Costco or Sam’s Club for stuff.  I’d expect Amazon to build out this aspect over time.

For Retailers & Distributors

  • Increased retail competition – just when you thought it could not get worse for retailers, it is getting worse.  Things that one swings in to just grab could be diverted to this.  Think of convenience, pharmacies (e.g. Walgreens and CVS), grocery (Walmart, Kroger, Safeway, Publix), electronics (Best Buy, Costco, Walmart, Target), sports equipment (e.g. Dick’s, Sports Authority).
  • Increased distributor competition – the businesses that source from traditional distributors could shift some of their purchases to this kind of model.  It will create the need for distributors to up their service level to stay competitive which can also drive up their costs.

Overall, I think I just experienced the future today.  I’d love to hear your thoughts.

 

 

 

 

RE: Is There A Craft Beer Bubble?

Craft Beer Bubble? May 2015

Fortune Magazine published a story by Chris Morris  May 14th that is getting a bit of attention, posing the thoughtful question: Is craft beer in a bubble?. The New York Times  published Craft Beer Is Booming, but Brewers See Crossroads asking the same question on February 4th.  I am now getting this question quite frequently from my friends both inside and outside the industry.  I’m in Chicago at the National Restaurant Association Show #NRASHOW and this was a hot topic last night over cocktails. 

It is particularly relevant given the amount of new outside money (many of my YPO and friends from other industries are investing in local breweries and increasingly distilleries.)  I read the statistic that there is a new brewery opening on average every day in the US this year.  In Fortune, they increase this by end of year to every 12 hours.   This statistic is a bit alarming on face value, but let us dig a little deeper.  To answer the question, one must answer two others:

1. Market Growth: Where is the market going – meaning is the growth in craft share going to continue and to what level?

2. New Capacity: Given the market assumptions from #1, can the size of the market absorb the growth in total capacity?

Market Growth:  First, a little perspective:  In craft beer boom 1.0 (circa mid 1990s), Chris Miller correctly points out there was a slow down in late 1997 and then flat to low growth for more than a decade before the current much larger boom.  My company at the time was actively investing in and building multiple craft beer brands both on the distribution front in Chicago (Goose Island, Sierra Nevada, Pete’s, Bells) as well as regionally/nationally (Goose Island, Rogue).   Fortunately, we also had a healthy import business (Grolsch, Staropramen, Tennant’s) that continued to boom during the slowdown.  At the start of the current boom, we helped Flat12 start-up in Indianapolis and acquired Napa Smith Brewery in 2009 (sold in late 2012).   There is very little comparison this time around from the 1990s.  The degree of craft beer penetration into the beer market is fundamentally different.   It is much deeper and wider, and is touching every market in some way.  That said, the current level of craft sales as a percentage of the beer market is still quite small nationally (11% of volume according to the Brewers Association) vs in select highly developed craft beer markets (Portland, Seattle, San Francisco, Denver).  That number has roughly doubled in the past 5 years.   I predict craft beer sales will double again and exceed 22% of the US beer market by 2020.  This mean approximately 22 million barrels of new craft sales on top of the existing 22 million.

(NOTE: one aside/caveat: craft beer is narrowly defined as independent brewers excluding cross ownership by larger companies in the alcohol industry.  This is more political than it is any reality with consumers.  Therefore the current share is actually a bit larger than 11%, adding in brands from companies like Goose Island and Craft Brewers Alliance (ABI).  My 22% number includes craft taken over by larger brewers).

New Capacity: This is where the “new brewery every 12 hours” statistic is not the most relevant one.   The important question is how much new capacity is actually being added to existing breweries combined with new breweries?  95% of the new breweries (and existing breweries) are more like restaurant businesses with a touch of manufacturing, than they are breweries.   They will never sell any meaningful volume outside their four walls of the tasting room.  There is nothing wrong with a local brewpub being a go-to stop for local people and there is clearly a market for this form of on-premise account.  The real question is how much capacity are the production breweries adding and how many of the start-ups actually believe they are going to sell beer outside their four walls.  This is where the true competitive dynamic in the marketplace will come into play.  Most new breweries that intend to go to market through distribution and retail will fail.  This is not because they have bad beer (some might but will die quickly) but rather they cannot make their brand relevant to the consumer in such a crowded field.  This lack of differentiation and branding will prevent them from having any meaningful distribution and retail penetration.

The lack of experience in running a full service brewery with a restaurant, attached to a major manufacturing operation, attached to a distribution business, attached to a consumer marketing company will be the downfall of many.   Here at the NRA, the 1000’s of operators can attest to the competitive nature of the restaurant aspect alone.  There are a lot of smart investors in restaurant companies that have leadership teams with deep experience fighting hard for their share of the consumers’ purchasing dollars.  Breweries that want to scale must both run a brew pub that competes with them and figure out how to sell in their beer to a limited number of tap handles available.

 

 

My conclusion as of today: The market can absorb many more breweries and capacity than exists today.  The ones that remain focused on serving their local clientele will have the best chance of success.  The ones that enter the fray of production and distribution will enter one of the most competitive and tough businesses that exist.   Those that do not bring an experienced team, significant capital, creative and compelling branding and distribution to the table will fail.  There is a bubble of inexperienced entrepreneurs combined with inexperienced investors who are entering the market.  I look forward to the shake-out and the opportunities it will create for those prepared. In the meantime, I love capitalism at work and entrepreneurial spirit the craft beer market is demonstrating for all to see.

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