Hill Street Beverage Company (CVE:BEER) CEO Terry Donnelly discusses the organization’s status as the most awarded alcohol-free beer and wine company in the world. According to the US government, 44 percent of North America’s population take prescription drug medication that is contraindicated to alcohol; however, there are no medications that are contraindicated to cannabis. Consequently, Hill Street “decided to take that platform of great tasting, award-winning products and evolve it for the new cannabis-infused beverage marketplace.” Donnelly and West sample Hill Street products including a rosé, a Chardonnay, a pilsner, and a Merlot. The pair discuss Hill Street’s partnership with Lexaria Bioscience Corp (CNSX:LXX) (OTCQX:LXRP) to deliver cannabis-infused beverages with zero impact on the odour and taste.
James West: Hey, welcome back to Midas Letter Live. My guest in this segment is Terry Donnelly; he is the CEO of Hill Street Beverage Company, trading on the TSX Venture under the – oh, I love that symbol – BEER.
Terry Donnelly: Absolutely.
James West: That’s great! Terry, welcome.
Terry Donnelly: Thanks. Pleasure to be here.
James West: Terry, I’m guessing that Hill Street Beverage Company has something to do with the beverage industry.
Terry Donnelly: We absolutely do. We are –
James West: What do we got? What do we got? What do we got?
Terry Donnelly: Well, we are the world’s most awarded company that focuses exclusively on alcohol-free wine and beer.
James West: Whoa, alcohol-free wine and beer.
Terry Donnelly: So we have won three World Championships for our craft lager; our draft has actually won two bronzes and a silver; we won a double gold for our Cabernet Sauvignon, which I actually didn’t bring a sample of, but we have our Merlot, and that was won at the San Francisco International Wine Competition, which is the biggest wine competition in the world. There’s over 42, I heard, wineries that compete in that competition.
James West: Wow. Congratulations.
Terry Donnelly: And the world championship with beer, there’s over 5,000 beer companies that compete in the World Championship of Beer that happens in Atlanta. So in the non-alcoholic segment, there’s literally thousands of brands. So it’s not a small little segment; it’s actually the world’s fastest-growing beverage category in alcohol free, and so we actually decided to take that platform of great tasting, award-winning products and evolve it for the new cannabis-infused beverage marketplace. So we’re adding this new portfolio of cannabis-infused beverages to our alcohol free products.
James West: Wow. So you’ve already got global distribution on these products?
Terry Donnelly: Well, no, we’re distributed only in Canada; we’re currently in about 4,500 stores across the country, expanding – every time I talk to my head of sales we’ve landed a new chain. We’re getting a lot of interest because the alcohol-free segment, especially for our craft products, is – there’s just a huge amount of demand amongst consumers to find ways for them to be able to enjoy a nice, cold beer without being intoxicated. Or, more importantly, is to be able to enjoy a nice, cold beer without impacting their medication. And there’s about 44 percent of the North American population that’s on a prescription drug medication that’s contraindicated to alcohol.
James West: 44 percent?
Terry Donnelly: 44 percent, and that’s US Federal government statistics.
James West: Those are big numbers.
Terry Donnelly: Those are big numbers. There’s over 450 prescription drugs that are contraindicated to alcohol, and so far, we know of no medications that are contraindicated to cannabis. So we think there’s going to be a big opportunity for people who can’t drink alcohol because of a health condition, to be able to get back into the adult format beverage marketplace, be it wine or beer or cocktails, with either an alcohol-free product that’s actually good-tasting, or a cannabis infused product that gives them the same level of social stimulant that people who are healthy enjoy with alcohol.
Or something that has reduced calories. You’ll notice that with our products, they’re all endorsed by Weight Watchers. The wine has approximately 80 percent fewer calories than wine with alcohol.
James West: Wow.
Terry Donnelly: The beer is about a 60 to 70 percent reduction.
James West: That’s impressive.
Terry Donnelly: So you can kind of have a guilt-free little, you know, moment, delicious beverage, without –
James West: Guilt has never been an issue for me.
Terry Donnelly: So I thought we could open with a little brut rosé.
James West: Sure.
Terry Donnelly: This is one of my favourite products; it’s literally one of those things where you go, you know, I could just sit and drink this all day. Just such a lovely, refreshing, full bodied and yet, I hope you’ll find when you take your first sips, most people go – well, wine without alcohol, isn’t that just grape juice? I think you’ll notice the difference.
James West: It’s interesting, I have a case of rosé being delivered to my house today that is supposedly one of the better rosés on the planet this year.
Terry Donnelly: I’ll just give you a little sample.
James West: Sure.
Terry Donnelly: When I was doing my investor meetings, I’d always break out one of these, say, “Have a sip, and then we’ll see if we should continue the meeting.”
James West: Hmm, smells like rosé. Wow. That’s fantastic. It has no alcohol in it?
Terry Donnelly: Zero percent alcohol.
James West: It tastes like it does have alcohol in it.
Terry Donnelly: I know. That’s because it’s fermented rosé. Like, we start with a world class rosé, and then the process that we use to remove the alcohol has zero impact on the flavour.
James West: Really.
Terry Donnelly: It’s a very tricky process, takes a lot of expertise and a lot of care, but it’s something that we’re quite proud of the ability to create something that really gives you that sophisticated, volatile, complex flavour that you would get from a grape.
James West: And it does have an incredible flavour profile right from the top to the bottom. I mean, the fruit, just the mouth feel is just great. Amazing! That’s –
Terry Donnelly: Enjoy that, and I’ll give you a little bit of the Chardonnay.
James West: Boy, if I didn’t know any better, I’d say I was going to have a buzz on after this, but I don’t think I will!
Terry Donnelly: I had one investor actually tell me, he said, you know, I’ve drunk much worse-tasting wines with alcohol.
James West: That’s not something one would generally want to admit.
Terry Donnelly: I know. I just thought that was a funny way of thinking about it.
James West: That’s funny.
Terry Donnelly: This is a Chardonnay. These are all made from a French winery that we sourced. Vines are around 150 years old. So, very old vines, very full-bodied flavour. Perfect for a nice summer day sitting on the patio. So it’s another great-tasting product. This is actually our best-selling product.
James West: Is that right?
Terry Donnelly: The Chardonnay. Yeah. It outsells the red about 2 to 1 and the brut about 3 to 1.
James West: Boy, that rosé is still at the top of my list of the ones I’ve tried so far.
Terry Donnelly: And the nice thing is, as I mentioned, the process that we use to infuse cannabis means that the beverage that you’re tasting right now is the exact taste and aroma that you’ll get from the infused product that we produce when that becomes legal.
James West: That’s interesting, because I’ve tried a few infused beverages, and you know, uniformly, they have not been able to eliminate the taste of that sort of floral, aromatic, oily taste of the cannabis. I mean, it’s there in some respect, either very faintly, in some cases much more so than others. I have tried a cannabis-infused beer that was an excellent, excellent, excellent beer, that I could not taste the cannabis in, and that was a real eye-opener.
Terry Donnelly: And cannabis is a cousin of hops, so, you know, it’s actually not that difficult for you to use cannabis the way you use a hop to flavour a beer. And there’s certainly people out there that are going to be making beer from cannabis or infusing beer, putting the cannabis directly into the beer. You know, our process of infusing essentially means that we can standardize dosage very effectively, and standardize the experience very effectively by concentrating strains, by being able to very definitively measure how many grams of CBD or THC there will be in the end beverage.
James West: So you’re partnered with Lexaria for this infusion process?
Terry Donnelly: Yes, exactly, and when we began down the path with Lexaria, we were going through a process of reviewing all of the available infusion technologies that existed, and that was one of the main reasons why we chose Lexaria, was because they could deliver a product that had literally zero impact on the odour and taste. That was the number one criteria for us. There’s all kinds of companies that can take cannabis oil and make it water soluble, or make it something that has the accelerated availability, the bioavailability and absorption that Lexaria has.
James West: Sure.
Terry Donnelly: But there was no other company that we looked at – and we looked at a lot of them 0 that could render the cannabis oil completely benign as an ingredient so that our Chardonnay or our rosé, which are very delicate, very nuanced flavours, that flavour shines through with literally zero impact from the cannabis. And that was the one main criteria that Lexaria stood head and shoulders above anyone else that we looked at. So, why we chose them.
James West: Sure. So is the price of these products – now, these obviously don’t contain cannabis yet – but are the price of these products competitive with other products that you’d find in grocery stores that are representative of de-alcoholized products?
Terry Donnelly: Yeah, we actually price our products to compete in the segments that they’re in. I mean, our craft beer is about $3 a can; this is about $8, $9 for a six pack, for our draft beer, for this product right here; and the wine is anywhere from $10 to $18 a bottle right now. And these are non-vintage table wines. So when we come out with an infused product, and this is one of the things that we’re really excited about being able to do, is to be able to produce fine vintage, alcohol-free infused wines. So that’s one of the things you’ll notice on the label is, there’s no year.
James West: Right.
Terry Donnelly: So that’s called a non-vintage wine, and that comes from the fact that we take a single vintage varietal – so the Chardonnay of 2015 – but we have to actually blend it with fresh grape juice to end up with the product the way it is. But our new advances in the de-alcoholization technology allow us to actually maintain a single vintage in the bottle.
James West: Wow.
Terry Donnelly: So that there’s no need to add additional grape juice at the end of the process.
James West: Interesting. Can we try the Merlot? Because for me, that’s going to be a real – can I do the honours?
Terry Donnelly: Well, I was going to wait until towards the end so just let it warm up a bit – it’s been in the cooler with the other products, so it’s a little chilled. If you like, you can try it right now and drink it a little bit chilled.
James West: I love – I drink my reds at a maximum of 17, 18 degrees.
Terry Donnelly: Okay, so if you want to try it why it’s a little cooler?
James West: Well, I’ll give it – does it want to breathe?
Terry Donnelly: Absolutely. It gets better tasting as it oxidizes, so we can let it breathe.
James West: Okay, then, I’ll finish my beer and we’ll pour a little of this.
Terry Donnelly: Pour a little in, and we’ll have it sit in the glass for a while.
James West: Sure.
Terry Donnelly: But you’ll see, you know, from the colour and the body of the wine, that it’s definitely a full-bodied merlot, and certainly has the nose.
James West: It’s actually…mmm! Well, it’s going to have to warm up a bit before we can really get a nose on that.
Terry Donnelly: Exactly. But the Pilsner, which is our draft, is just a great summer drinking beer. You know, and we’re extremely happy to have partnered with Prostate Cancer Canada – we’re the official beverage partner of Plaid for Dad, so a donation from every – actually, a donation from every product we sell goes to a health promotion organization, so whether it’s liver, the Canadian Liver Foundation, prostate cancer, you know, various charities that we partner within a society. Canadian Cancer Society, the various organizations that we partner with, who are researching issues related to alcohol. You know, alcohol is a toxin and does bad things in your body, whereas cannabis has actually been widely touted as a therapeutic agent.
James West: You’re preaching to the converted here. [laughter]
Terry Donnelly: So, what do you think of the Pilsner?
James West: I love it! It’s very refreshing.
Terry Donnelly: I’ll say it’s the perfect beer for the drive into work.
James West: [laughter] With this, we can drink and drive!
Terry Donnelly: Exactly.
James West: Oh, that’s interesting. How much annual – how much in, say, 2017, of your total product portfolio did you sell?
Terry Donnelly: Our numbers are filed. We did shy of 2 million, and it was a transition year. When I took over the company in March of 2017, it was less than a million in revenues. It had been operating as a private label brand for Mothers Against Drunk Driving.
James West: Oh.
Terry Donnelly: And so we took over that business and basically completely transformed it, and it had been operating for about 7, 8 years, just kind of muddling along. The brand really didn’t resonate with consumers, mostly because, you know, the logic of having Mothers Against Drunk Driving produce wine or beer for the designated driver makes a ton of sense, but consumers don’t just buy brands logically; they buy them emotionally. And when you actually consider all of the emotional attributes of the MADD brand for the noble cause and important work that it is, it’s not a celebratory social brand, which is what beverages, especially wine and beer, are. The experience of cracking a bottle of Champagne lifts everyone’s spirits; when you see the MADD brand, it’s very serious and sombre. It’s the exact opposite emotional response.
James West: Right.
Terry Donnelly: And so that’s one of the reasons why the brands never really took off. So when we re-branded and re-invented the company, you kind of had to press reset on everything. So we did that last year; we still managed to double our revenues, which was a very positive outcome, and we’re starting to see the impact of that. We’ve had one major retail customer that we’re in has actually ordered four times the product under the new brand, for the holiday period, and so we’re seeing the impact.
James West: Okay, so what has to change in the regulatory framework before these products can be sold legally?
Terry Donnelly: Well, the infused products are written into the cannabis legalization bill to be that edibles should be available within one year of achieving royal assent. So we’re running the business expecting that the infused products will be available in October 2019. Right now, the products themselves – so there is actually no legal creation for a cannabis-infused bottle of wine, in the law. So there’s no regulations on it, it doesn’t exist in the law, there’s no such thing in the laws around cannabis-infused beer. So they need to create these products first from a regulatory standpoint to allow them to exist in our political and legal landscape, and then we have to figure out where they’re going to be available.
Personally, I see no reason in the world why a cannabis-infused beverage shouldn’t be on the menu at Swiss Chalet.
James West: That’s right. They’ll sell more chicken.
Terry Donnelly: They’ll sell more chicken, it’s a safer, healthier alternative to alcohol. And with the same degree of stimulant level, with the same bioavailability, the same onset and duration as alcohol, which is what we’re creating; why wouldn’t a family restaurant want to have something that’s a safer and healthier alternative to the product they already carry? It’s still wine, still available in a bottle, we all know it’s five servings in a bottle; we know what a beer serving looks like, we know the level of stimulant that we get when we drink one. So we’re replicating all of that to be able to provide a true alternative to alcohol on the marketplace.
James West: Interesting. And so at this point, you’ve raised 4.8 million, and you just recently went public?
Terry Donnelly: Yeah, just recently went public about two weeks ago.
James West: Wow, okay. And so, how many shares outstanding totally?
Terry Donnelly: Fully diluted, there’s 86 million shares, with a public float. What’s not in escrow is about 30 million that’s available for trading right now. So I think we’ve done well in the market that’s accepted us as a relatively solid entry into the marketplace, and we’re excited about, you know, what the future holds. We’ve got a whole plan and strategy around product formulation, packaging design, sorting out the distribution and retail availability of where the products are going to be sold. But still, you know, the goal for us is to be able to have something that you can bring to a party that fits what you’re looking for in a social, adult format beverage, which we think strongly is the right format. You know, gummies and chocolates don’t really appear as an adult format that, you know, wouldn’t be construed by your children as a candy.
James West: Right.
Terry Donnelly: The kids know not to drink Mom and Dad’s wine; they know not to go into your beer. They know the difference between a beer and a soda, right? So it’s important that we keep to those critical identifiers from a branding and packaging standpoint.
James West: You bet. Okay, that’s a great introduction. We’re going to come back to you, and I’ll look forward to more samples when they’re infused. But it sounds like an amazing idea and a great story, and we’ll be following with interest. Thanks for joining me today.
Terry Donnelly: James, absolute pleasure. Thanks for having us.