October 17, 2018 was an important milestone for the Canadian cannabis industry: the legalization of recreational cannabis for adult use. However, for both many Canadian cannabis companies and cannabis investors, October 2019 is expected to yield an equally important milestone.
One year after the original legalization of recreational cannabis, the legalization of value-added cannabis “edibles” and other infused products is scheduled to come into effect. While the final legislation has yet to be drafted, this will add an important new dimension to Canada’s cannabis industry for cannabis consumers and companies alike.
In particular, the introduction of cannabis-infused beverages is highly anticipated. One of the companies that is particularly well-positioned to capitalize on this opportunity is Hill Street Beverage Company Inc. (TSX: V.BEER, OTCQB: HSEEF, Forum). More on Hill Street’s operations later.
Why are both cannabis investors and cannabis companies so enthused about the commercial potential of cannabis-infused beverages? Investors need only look south of the Border. In a November 2018 article, Ryan Smith, CEO of U.S. cannabis branding and marketing company LeafLink framed the U.S. market for these products.
“Purchasing trends on our platform have shown an accelerating shift toward branded, consistent products that resemble recognizable consumer packaged goods. They are incredibly discreet, hide the taste of cannabis well, and provide a fast-acting dosage without the guesswork of a typical edible.” [emphasis mine]
The same article reported that these beverages are “flying off the shelves” in the United States, with sales increasing by 88% from 2016 to 2017, according to Flowhub.
This leads back to Hill Street Beverages and the imminent arrival of a Canadian market for cannabis-infused beverages. Hill Street is already established as a manufacturer and distributor of award-winning alcohol-free beers and wines. For management, cannabis-infused beverages were a natural extension of its business model: safe-and-delicious adult recreational beverages.
Unlike alcohol, which is “contra-indicated” (i.e. dangerous to consume) with respect to countless pharmaceutical drugs, cannabis is not contra-indicated with respect to any known pharmaceuticals. In societies that are increasingly (and heavily) medicated, this safety factor has never been as important in the adult beverages marketplace.
While the potential of cannabis-infused beverages as the next big growth opportunity in Canadian cannabis is clear, there is a ‘fly in the ointment’ from the perspective of Canadian companies. Draft legislation currently in place would require cannabis companies to set up entirely separate facilities for the production of cannabis-infused beverages.
This implies both greater capital expenditures and higher operating costs for these soon-to-be-legal cannabis products. As part of the Cannabis Beverage Producers Alliance, Hill Street is currently lobbying the federal government for less-stringent requirements in this area. However, management wasn’t standing still waiting for such changes to be approved.
On May 28, 2019, Hill Street announced a critical acquisition to enhance its business model: OneLeaf Holding Corp, parent company of OneLeaf Cannabis Corp. OneLeaf is advancing through Health Canada’s cultivation permitting process, currently at the “evidence package” stage.
Terry Donnelly, Chairman and CEO for Hill Street explained what OneLeaf Cannabis brings to the table.
“The OneLeaf team has built a world class, 48,200 square foot facility, built to EU GMP standards, that will house growing, extraction, and infusion. It will house the infusion, bottling, and canning of our beverages under one roof. Their catalogue of over 700 distinct cannabis cultivars, which have been collected and cultivated by the founders, includes a collection of Cannabis Cup award-winning cultivars and a diverse selection of landrace varietals. We anticipate that OneLeaf’s elite genetics, which include many cultivars not legally available anywhere else, will pair perfectly with our beverages to provide unique attributes and experiences for our consumers.” [emphasis mine]
With this one deal, Hill Street accomplishes three important objectives for itself and the Company’s shareholders:
- Vertical integration: adding a cannabis cultivation operation will significantly improve the efficiency/cost-effectiveness of the Hill Street business model
- Acquisition of the OneLeaf facility provides the separate manufacturing site that would be required under existing language in the draft legislation
- Premium cannabis to use as an input in Hill Street’s premium beverages
This all-equity acquisition does more than merely address issues that were of concern to Hill Street management as the introduction of cannabis-infused beverages into Canada approaches. Most investors would view OneLeaf Cannabis as an ideal component to add to Hill Street.
Further, Hill Street previously announced a partnership with Lexaria Bioscience (CNSX: LXX) to license a technology that allows cannabis to be infused into beverages without impacting the taste or smell of the product. What that means is those award-winning alcohol-free beverages currently produced by Hill Street will taste the same after cannabis has been added.
Award-winning alcohol-free beers/wines combined with award-winning cannabis. That’s a winning combination.
For investors looking for a way to successfully enter the upcoming market for cannabis-infused beverages in Canada, Hill Street Beverages has just taken a giant step forward in perfectly positioning itself for this opportunity.