UK CBD beverage market in 2021. 7 things to watch this year.
It is hard to make predictions, especially about the future. We’ve made predictions of what we think may happen in 2021 with the CBD beverage market. We are not trying to be right (that would be foolish). It is just something we did to make us think what may happen and how we as a business can respond.
Impact of Covid restrictions on the retail and hospitality industry
This is one of the biggest unknowns facing the market. While the year did not start well, the positive news of vaccination approvals and the fast rolling out of the vaccination programme is filling us with optimism.
Hospitality has suffered the brunt of the impacts of Covid lockdown and the landscape will be significantly altered in the coming months. Last year 10,000 pubs, clubs and restaurants closed their doors and this number may increase further in the future. We hope the government will provide support for the sector.
While we do not know for sure how long the lockdown or any restrictions will last, we believe things will go back to a certain level of normality by summer. The Bank of England expects a rapid rebound in Q2. Goldman Sachs is also predicting a strong consumption boom in summer 2021. This is consistent with some of the best Covid-19 modelling, which assumes the US will achieve herd immunity by July (this will happen as a combination of immunity from vaccination and immunity from infections). The UK may achieve its herd immunity even faster due to the rapid rollout of the vaccine. Our expectations are that the restrictions will slowly be eased and by summer life will be more relaxed. Of course, many restrictions, such as mask wearing, limiting physical interactions and handwashing will stay in place for the foreseeable future.
However, in case new coronavirus variants emerge that are resistant to vaccines, all bets are off.
There will be further transition to B2C as more people become used to shopping online.
The novel foods deadline is fast approaching (31st March 2021) and the companies that want to continue selling products in the UK will require novel foods authorisation from the UK FSA for their CBD extracts and isolates.
Currently, no primary CBD manufacturers have had their applications approved, but it is expected that over the next few weeks a list of validated applications will be made publicly available.
This may create significant barriers to entry in the UK CBD market due to the effort required to submit all required information and this may reduce the number of CBD providers in the UK and can disrupt existing supply chains.
While this may have implications in the short term, we do not foresee novel foods to present a significant obstacle for drink manufacturers. In cases where suppliers/CBD manufacturers will not be able to demonstrate compliance, CBD drinks brands will simply choose suppliers who will have all the required documentation. The problem may arise only for companies that use very specific formulations that have been developed for a specific purpose.
Expansion of the market
Novel foods approval will provide much needed clarity and a number of retailers and food service businesses that are currently reluctant to list CBD products will begin to do so. Hence, we expect the market will get a boost with more opportunities opening up. We believe the market will expand, with on-trade accounts becoming more prominent as they try to offer customers something new in order to win business back from supermarkets. We also expect many retailers, such as Booths, Sainsbury’s, Tesco, Morrisons and even discounters stocking CBD drinks.
Established brands entering the market
Resolving the novel foods issue will also de-risk entry into the market for established beverage brands, which so far were only observing the market. We will not be surprised if brands, such as Fentimans launch a CBD soft drink that is targeting mainstream consumers.
Since CBD market and beverage development is associated with relatively low entry barriers one can also assume more start-ups to enter the space or extend their range with CBD. This will further increase price competition. Perhaps even some US CBD drinks brands, such as Recess may enter the UK market. They indicated that the UK market is their priority market.
CBD may also become attractive for producers of spirits and beer. Brewdog may offer CBD IPA and become one of the big brewing companies entering the space following companies such as Heineken, Molson Coors and Constellation Brands that are currently offering CBD and THC infused beers in the US.
Large and established companies have cost advantages against small brands. It is expected that new entrants (large and small) will compete on price to capture the market from existing brands (it is the easiest and least imaginative form of competition). This will put further downward pressure on margins.
When Cannasa launched in spring 2019 the only CBD drinks were Botanic Lab, Green Monkey, 420 and Bumblezest. Since then the CBD drinks market has become very crowded with over 20 CBD brands trying to make a name for themselves. However, the cutthroat market will put a strain on a number of them. Companies will need to find a meaningful differentiating proposition to remain relevant and maintain their margins. The drinks space is particularly exciting since consumers are looking for a number of propositions, not only the price and CBD amount.
We expect further innovation in the CBD space. CBD is not water soluble which presents a significant technical challenge for beverage companies. The current default option for formulating water-soluble CBD is to use emulsions; however, this presents a number of challenges, some of them include: taste of the drink, milky or cloudy look, stability and bioavailability. Emulsions are also packed with preservatives and emulsifiers made of soy or egg – well-known allergens. Addressing these challenges may further improve the quality of CBD drinks as well as help brands differentiate themselves. Cannasa has already cracked these challenges using unique microencapsulated CBD that solves all the above issues and is hence the only clean CBD drink on the market today.
We believe companies will try finding solutions that may mitigate some of these challenges, and this will require investment into R&D making some of these methods more expensive, hence it is a question how many brands will actually adopt them.
Minor cannabinoids, such as CBG may also find their way into the product offering.
As CBD drinks find their way into the basket of an average consumer, we believe more consumers will become more educated about CBD and they will increasingly ask companies to disclose more information about the type and quality of CBD. We believe many health minded individuals may shun brands that cannot deliver on the clean label promise.
We also expect due to the current economic climate that the CBD market will become more polarised. Consumers may either opt for value propositions or they may increasingly look for premium products.