The Biggest/Best Market for Cannabis-Infused Beverages

Cannabis isn’t new, but it is big and about to get much bigger in Canada as official legalization of adult-use recreational cannabis becomes a reality on October 17th. How big?

For new investors to the cannabis sector and those who simply need a reminder, the potential in Canada alone is enormous. A Financial Post article from May 2018 projects legal cannabis to be a $6.5 billion per year market by 2020 – noting that at that level cannabis sales would surpass the sales of hard liquor in Canada.

However, this is a sector with numerous potential applications and thus many niches in which cannabis companies can operate. Where is the potential for the most revenues? Where will the strongest margins materialize?

One Company that isn’t shy about offering detailed answers to those questions is Hill Street Beverage Company Inc. (TSX: V.BEER, OTCQB: HSEEF, Forum). In a conference call with Stockhouse Editorial, what was quickly apparent is that this is a cannabis company that’s not blowing smoke.

Hill Street Chairman and CEO Terry Donnelly is quick to identify the cannabis-infused beverage market as the single most-lucrative opportunity in the cannabis space. Indeed, it is precisely because of the scope of the opportunity for Hill Street itself that management made the decision to take the Company public, just obtaining its Venture Exchange listing on July 31, 2018.

Certainly, Hill Street is not alone in terms of highlighting the potential of the cannabis-infused beverage sub-sector. Any investor who follows the news will be aware of the recent $5 billion strategic investment by Constellation Brands Inc (NYSE: STZ) (maker of Corona Beer) in Canopy Growth Corp. (TSX: WEED).

While most small-cap cannabis companies hardly even twitched on this news, BEER popped by 50% off of its previous day’s close. While it’s given back some of those gains, the stock is clearly trending higher.

Why is the market seeing Hill Street as one of the winners as competition heats up in the cannabis sector – and Big Players start to enter the scene? There are a large number of both general and specific reasons.

In general, Canadian cannabis companies have been taking a rapidly growing interest in cannabis-infused beverages going back to well before the Constellation Brands/Canopy Growth mega-deal. Cannabis “edibles” offer several basic advantages as a consumer option.

  • Convenient
  • Discreet (versus smoking)
  • Healthier (versus smoking)

Cannabis-infused beverages offer one, additional critical advantage versus other edible products: the full social experience as a “recreational” option for adults. When adults congregate to socialize, while food is often a component it is the communal consumption of beverages which is central.

This is not merely social whim. It’s practically hard-wired into our psyches. Talk to Donnelly and he will be happy to provide investors with a history lesson.

“The tradition of sharing a fermented beverage goes back 10,000 years. One of the origins was spilling a little of my beverage into your glass and vice versa while ‘clinking glasses’ and looking directly into your eyes. If you showed fear, then chances are you had poisoned me. So sharing a beverage was one of the earliest ways to learn if you could trust someone. It helped create a bond of friendship, loyalty, and trust way back then, and still does now.”

We like to drink when socializing with friends and family. So why are sales of alcoholic beverages flattening out, and even starting to see declines?

One reason could be the fact that alcohol is both addictive and toxic – it is a Class I carcinogen – and health-conscious consumers are looking for better choices. Another reason could be the increase in prescription drug-users across North America, since there are hundreds of prescription drugs that are “contra-indicated” for use with alcohol.

For consumers, wouldn’t it be great if there was an option as a recreational social beverage for adults that provided all of the fun, but none of the fear? Better yet, what about beverages that provide all of the fun, none of the fear, and also yield equivalent aesthetic enjoyment to what consumers currently get from consuming their favorite beers and wines? What if this option also came with significantly fewer calories than alcoholic beverages?

Enter Hill Street Beverage Company. BEER brings all of the following to the Canadian marketplace:

  • Award-winning beer and wine recipes
  • Unparalleled expertise in producing and marketing premium alcohol-free beverages
  • The license of an efficient technology from Lexaria Bioscience that enables cannabinoids to be infused into their award-winning beverages without impacting the taste or smell of the products

When it comes to cannabis-infused beverages, all of the companies operating in this space are pioneers. However, when it comes to alcohol-free beverages for recreational consumption by adults, Hill Street was a pioneer here a decade ago. It has a 10-year head start on positioning itself in this market and a 10-year head start in developing market penetration strategies that are unique to this niche.

That’s a very potent competitive advantage by itself, especially for a management team loaded with experience in beverage marketing; over a century of combined experience, to be exact.

But it’s a hollow advantage to be best at marketing if you don’t have something attractive to bring to market. Truly appreciating Hill Street’s strength as a competitor in the cannabis-infused beverage space, then, begins with its existing product lines of award-winning alcohol-free beers and wines. BEER tests the mettle of its products in the world’s leading competitions for beer and wine.

For beer, it’s the U.S. Open Beer Championship. The Company’s premier offering is its Craft Brewed Lager, the world’s first alcohol-free craft beer. Craft Brewed Lager won the Gold Medal in 2014, 2015, and 2017. It earned a Silver Medal in 2016 and a Bronze this year – consistent world-class quality. BEER’s more recent Designated Draft won a Silver Medal in 2017 and a Bronze Medal in 2016.

In wine, the San Francisco International Wine Competition dominates. Hill Street’s “Vintense” de-alcoholized wine is also an award-winner, with its Vintense Cabernet Sauvignon capturing a Double Gold Medal in 2017.

Hill Street has seven varietals of Vin(Zero) brand wines and also imports additional varietals under the Vintense and Vintense Origin brand names. With more than 20 brands, this is Canada’s largest selection of alcohol-free wines.

This is a consumer market that was already growing in leaps-and-bounds even before the words “cannabis infusion” entered the equation. As noted previously, sales of conventional alcohol beverages have already flattened out. Meanwhile, sales of alcohol-free adult beverages are soaring.

Marketing Strategies

Consumers have already begun the migration from alcohol beverages to de-alcoholized equivalents. They have shown a willingness to sacrifice the “fun” in order to eliminate the “fear” and the calories. Hill Street’s upcoming line-up of award-winning, alcohol-free beers and wines infused with cannabis means that consumers no longer need to make that sacrifice.

After decades of anti-cannabis propaganda, many consumers are still reticent about consuming something that they were recently (and erroneously) told is “a dangerous drug”. Alcohol and nicotine are dangerous drugs. Cannabis is non-toxic and non-addictive; a benign alternative to alcohol consumption.

Why else does Hill Street remain committed to its original product lines? Strong partnerships.

Early in Hill Street’s evolution, management shrewdly identified the potential for forging strong partnerships with media, health, and charity groups. Two elements of BEER’s own marketing are highly compatible with the messaging produced by media, health and charity groups.

  • Healthier beverages
  • Safer beverages

As noted, alcohol presents numerous health risks and issues, even apart from the potential for addiction. BEER’s beverages deliver the beer and wine taste desired by consumers, minus the health risks from alcohol. Equally, Hill Street’s alcohol-free beers and wines are a safer option for consumers in the era of the Designated Driver.

To the unsophisticated eye, such partnerships are seen to generate corporate goodwill and word-of-mouth advertising. But for Hill Street’s management, this is all part of a highly-targeted digital marketing strategy. Ask Donnelly about such partnerships and he’ll skip right past the “goodwill” and focus on the bottom line.

“It is widely known in the marketing world that cause-related brands greatly enhance consumer loyalty, and increase brand value dramatically.”

With its existing line-up of premium products along with its sophisticated and well-developed marketing strategies, Hill Street arguably occupies pole position when cannabis-infused beverages become legal in Canada (expected in 2019). What about its technology?

As noted, Lexaria’s cannabis infusion technology is both tasteless and odorless, meaning consumers don’t have to compromise on the taste of these craft-quality beverages. For investors, however, the efficiency of this technology is just as important.

As Donnelly explained to Stockhouse, the Company is forecasting that only 5 mg’s of THC will be needed for cannabis-infusion because of the high level of bioavailability from Lexaria’s infusion method. Currently, cannabis strains contain up to 30% THC (tetrahydrocannabinol), the mildly psychoactive cannabinoid in the cannabis plant.

This means that a single gram of cannabis oil (wholesale price: < $20/gram) can infuse more than 200 Hill Street adult beverages. In speaking with Stockhouse Editorial, Donnelly quipped that the Company will likely spend more on hops than they will on cannabis.

Great-tasting products. Strong infusion technology. A detailed, sophisticated marketing strategy for cannabis-infused beverages. An enormous head start on the competition in advancing this marketing strategy.

BEER may have only started trading as a publicly listed company in August, but it’s been preparing itself for this opportunity for a decade – an advanced-stage cannabis company at a ground-floor price.

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