The market for CBD and other cannabis-derived products is already large and growing at a double-digit pace. But what do consumers think of the offer and what are they after? Is CBD a threat or an opportunity for traditional brands and companies? What can they do to structure and grow this market? How should they mine the cannabis-derived trend to reap its rewards?
To answer these critical questions, Emerton has conducted a survey on ~1,000 US consumers and non-consumers of cannabis-derived products, focusing on current consumption behaviors, the roadblocks this market still faces and the role traditional brands and companies can play to fully unleash its potential.
To see the exhibits, please download the whitepaper
THE MARKET FOR CBD AND OTHER CANNABIS-DERIVED PRODUCTS IS POISED TO EXPERIENCE SUBSTANTIAL GROWTH
The market is already sizeable and its growth rate is expected to remain high, fueled by consumers who are loyal, satisfied and ready to spend
The US adult legal use cannabis market (recreational cannabis) is already a sizeable market
It is estimated at $7.6B in 20192, accelerated by the 2018 Farm Bill which legalized hemp-derived canna-binoid products. This new regulation paved the way for CBD and other products, with CBD fitting into the realm of health, wellness and functional foods, with various claims, most of which have yet to be scientifically proven.
Growth is expected to remain high
Going forward, the US recreational cannabis market is forecasted to experience double-digit growth (~14% per year) and is expected to reach $15-20B by 2025 in states with operational cannabis markets. These projections may even be conservative considering that, as 2020 begins, less than 30% of the US population lives in one of the 10 states (plus D.C.) with access to recreational cannabis. 11 additional states5 with active medical cannabis programs are considering legalizing it for recreational use, in which case the proportion of residents living in legal recreational cannabis states would increase to more than half the country’s population (54%).
Penetration is still low so there is still a lot of room for growth
Furthermore, the market penetration of cannabis is still low, with a rate of only ~10% among 18+ year-old monthly users in the states where it is legal6. Most early adopters of cannabis-infused beauty, food or beverage products seem to come from the pool of cannabis smokers (~60% of consumers of such products say they also consume flowers, pre-rolled joints or vape cannabis products).
Current users are already repeat-consumers
Consumers of cannabis-infused products are regular users, regardless of the product they use: the Emer-ton survey highlights that 54% of cannabis-derived beauty product users, 28% of cannabis-infused food consumers and 41% of cannabis-infused drinks consumers use these products daily or multiple times a week. These proportions increase to 86%, 62% and 71% respectively when considering weekly usage (Exhibit 1).
Satisfaction is high among current consumers
Consumers are also very satisfied, with more than 80% of them considering the products they use to be very or extremely effective (Exhibit 2). Consequently, the cannabis-derived beauty and food & beverage markets benefit from high consumer-retention rates: more than half of users intend to keep using these products indefinitely (Exhibit 2).
Current consumers spend substantial amounts on cannabis-derived products
Consumers appear to spend a significant amount of money on cannabis-derived products, with room to grow: for example, 58% of cannabis-infused beverage consumers spend more than $100 per month on these products and, when asked how they would split an extra $100 among all kinds of beverages, more than half reported they would spend at least an additional $50 on cannabis-infused beverages specifically (Exhibit 3);
The size and forecasted growth of the market and the legalization trend make the US a fertile ground for cannabis-derived products to thrive, as illustrated by the surge in investments in the cannabis industry in recent years, growing from less than $1B in 2015 to ~$14B in 2018. However, the relatively low penetration rate reveals that a lot of the market potential remains untapped and that some roadblocks are still hindering its development.
ROADBLOCKS WILL NEED TO BE LIFTED TO UNLEASH THE FULL MARKET POTENTIAL OF CANNABIS-DERIVED PRODUCTS
Consumers’ misconceptions, lack of trust and an unclear regulatory environment are some of the headwinds, if not roadblocks, that the market for cannabis-derived products is currently facing
Consumers are still uneducated about cannabis derivatives
US consumers remain very uneducated about cannabis derivatives and still hold major misconceptions. The Emerton survey reveals, for example, that only 18% of non-consumers can tell the difference be-tween CBD and THC, and most of them are unaware of their respective effects. The shortfall is especially striking for CBD-infused products: close to 60 % of all respondents in Emerton’s survey think that CBD is psychoactive or do not know if it is.
Lack of trust is a barrier to adoption
The lack of scientific information available to date about CBD or its effects on the body leads to a lack of trust from consumers (see Exhibit 4) and certainly fuels their resistance to adopting these products: our survey showed that if cannabis-infused items were classified as legal and safe, ~60% of non-users would likely purchase cannabis-infused items (Exhibit 4). More scientific studies would also provide guidance for regulation by the FDA.
Despite the recent liberalization, the regulatory environment is still unclear
Despite strong consumer demand and the legalization of CBD at the federal level in December 2019, the FDA has not formally approved any CBD product and still considers the compound to be an unapproved food additive prohibited for use in human or animal food, or as a dietary supplement. Many states are still restricting it and in a Nov. 25th, 2019 advisory, the FDA recommended caution regarding CBD, telling consumers that even though it is not psychoactive, there is not enough research to ensure CBD is safe to consume.
Other, more “classic” business challenges must be addressed
Cannabis-derived products will need to prove that they can be better than the current products used by consumers to address their needs, be it in the beauty or food & beverage sectors. Moreover, competitive prices and accessibility (presence in retail and online) will be key to make sure that non-consumers willing to become consumers are not deterred.
Lifting the non-consumers’ mental (misconceptions, health & safety concerns) and practical roadblocks (availability, pricing) appears key to unleashing the potential of the cannabis-derived products market. If successful, the growth potential seems to be substantial. Traditional companies and brands can, and should, play an active role in supporting the market development.
TRADITIONAL COMPANIES AND BRANDS HAVE A ROLE TO PLAY IN UNLOCKING THE MARKET
Although the regulatory framework is unclear, the strong consumer appetite and the non-user interest in CBD-infused items are pushing a growing number of brands to investigate the market. Our work shows that traditional companies have a critical role to play in unleashing the full potential of the “cannabis-infused” markets.
Research demonstrating the effectiveness and safety of products will fuel efforts to accelerate and positively influence regulations
Considering the lack of scientific studies and unclear regulatory framework, large corporations in Personal care and Food & Beverage can accelerate research efforts to demonstrate the effectiveness and safety of the products. Several established companies have already joined forces to conduct research projects to potentially present to the FDA (e.g. Johnson & Johnson through the JLabs incubator), betting on the fact that the demand for CBD products and the corresponding commercial offer will eventually lead the FDA to expedite a federal regulatory framework. Being an early player in these markets could be a lucrative positioning to adopt.
Educating consumers and leveraging existing brand platforms will increase trust in products
If reassuring consumers on the safety of CBD products is the very first step to unlock the market potential, educating consumers on product usage and effectiveness is just as important. Brands should highlight consumer experiences, e.g. through social media platforms moderated by large brands, and multiply sample distribution campaigns.
Moreover, large companies in the skincare and food & beverage sectors seem to be especially well positioned to fill the gaps jeopardizing the cannabis-infused products segments. Our research shows that large companies are the most trusted to increase consumer awareness, trial and consumption (Exhibit 5): 40% of non-users would react positively to large companies’ forays into cannabis-derived products, while only 18% would react negatively. Brand-building by large companies is therefore an opportunity to explore.
TRADITIONAL COMPANIES AND BRANDS NEED TO ADAPT THEIR STRATEGIES TO CONSUMER PREFERENCES
The cannibalization risk is different by category so the approach should also be different.
Develop the right product portfolio
Beauty and Food: low risk of cannibalization, so companies should treat the cannabis-infused products segment as an upside.
81% of cannabis-based beauty products users and 87% of cannabis-infused food consumers claim to use them in addition to their usual products (Emerton survey). Therefore, major brands within the food and beauty sectors should place some bets on CBD-infused products, given CBD is legal at the federal level.
Several market leaders have already begun to investigate the market: Sephora, Ulta Beauty and Estée Lauder have started promoting these products in various channels, mostly on e-commerce websites, while retailers such as Walgreens and CVS have started selling a limited number of CBD products such as lotions and creams. Mondelez, among other large players in the food market, stated it is “getting ready” to introduce CBD-infused products into their offering.
Beverages: some risk of cannibalization of alcoholic drinks, at least in the short-term, so companies should protect core products while building a second growth engine in CBD / THC products.
Cannabis-infused drinks represent a substitution risk to alcohol: our study reveals that the reasons most often mentioned for consuming cannabis-derived drinks are the same ones as for alcohol (Exhibit 6). Moreover, consumers associate positive claims to THC-infused drinks a lot more than to alcohol (e.g. 73% think that THC drinks are better for their health than alcohol, whereas only 9% think the reverse).
Traditional companies and brands seem to be legitimate to position themselves on the cannabis-derived products market in the eyes of consumers. Existing product experience and brand platforms can be great tools to educate consumers, increase trust and convert non-consumers into consumers. However, the approach will likely need to differ by product category.
Consequently, cannabis-infused drinks, and particularly THC-infused drinks, appear to have the potential to replace alcohol as a social lubricant: 58% of respondents say that they regularly replace alcohol consumption with the consumption of cannabis-infused beverages (Exhibit 7). This trend could be further accentuated if cannabis-infused beverages become more widely available, especially at liquor stores (currently, 20% of respondents say they most often purchase cannabis-infused drinks at a liquor store), especially for at-home consumption.
Pricing will also be key: the Emerton study highlights that if THC drinks were proven to give the same level of inebriation as an alcoholic drink, 58% of current cannabis-infused drink consumers would either buy more THC-infused beverages than alcoholic drinks or replace alcoholic drinks with THC-infused beverages completely (32%) if the price of THC drinks was lower, therefore offering a better “high for your buck”. (Exhibit 7)
Therefore, traditional alcohol manufacturers should consider CBD-infused drinks to expand their low- and no-alcohol offerings and to mitigate potential cannibalization in the at-home consumption occasion, while investigating the THC-infused drinks segment as an alternative social lubricant and offset what looks like a serious substitution threat to alcoholic beverages.
Some firms are already getting ready to mine the potential of cannabis-infused beverages, like brewer AB-InBev that signed a partnership with cannabis producer Tilray in 2018. Last Summer, Molson Coors Brewing and HEXO, a consumer-packaged goods cannabis company, formed a joint venture to produce cannabis-infused drinks under the name Truss. Adopting a more prudent approach, Diageo said it was keeping an eye on the cannabis industry but will avoid rushing into it.
Distribution: master the omni-channel experience
Our survey reveals that most current users seek information and purchase cannabis-infused products online or through a mobile application: 53% for beauty products, 51% for cannabis-infused food and 42% for cannabis-infused beverages.
Increasing online marketing, e.g. through social media platforms, and mastering the online purchase experience are therefore critical to succeed in this market.
Moreover, licensed retail stores are the second most preferred distribution channel for cannabis-infused products: focusing Sales and A&P investments on specialized retail and C-stores can prove efficient, especially given their usefulness in educating consumers, through knowledgeable salespeople (staff at retailers is the second most used source of information on products) and trials. Mastering the omni-channel path-to-purchase will therefore be essential to improve the shopper experience and to limit the grey market effects.
Our survey and research seem to indicate that cannabis-infused markets appear ripe for continued high growth, provided regulation is clarified and consumers are educated and reassured about product safety. Large established personal care and food & beverage companies need to play a leading role in increasing their acceptance and adapt their offering to mine these opportunities, or risk missing out on a lucrative business segment.
However, in this nascent market and without full legalization of the compound, market strategies need to be well thought through and some questions need to be further investigated: should large corporations develop products in-house? If so, under which brand? Should they partner with established specialized players? Is M&A the best option?