Rising High: Exclusive talk with cannabis market research firm BDSA

In this edition of “Rising High,” The Fly conducted an exclusive interview with Brendan Mitchel-Chesebro, industry analyst at BDSA, a Colorado-based cannabis market research and data analytics firm. Here are some highlights:

CANNABIS BEVERAGES: In July, BDSA announced new insights into the U.S. cannabis beverage landscape indicating that while a high-level view of the category may suggest it is set to decline, key markets show promising growth this summer. “We’re not showing really rapid sales growth when we’re looking at the aggregate of markets and beverage share is showing that it’s not super strong on a high-level view,” Mitchel-Chesebro said. “However, we are showing that there has been trending upward growth for the last three quarters, from 4Q22 to 2Q23.”

He said dollar sales have been trending towards decline in some of the most mature markets, but much of that is due to continued price declines since the end of 2021. “For example, California dollar sales of beverages fell about 9% between 2Q22 and 2Q23,” the analyst said. “That’s not necessarily indicative of the strength of the whole beverage category, because over that same period unit sales grew about 13%.”

Q1 DOLLAR SALES: BDSA found that beverages were the fourth largest edible subcategory in 1Q23, bringing in 6% of dollar sales of edibles, which Mitchel-Chesebro attributed to brand and product availability. “Especially compared to the candy category, there is just a huge difference in the number of brands that have beverage products across the markets that we track,” he said. “Candy is the biggest chunk of the edible sales. In 2Q23, there were 5,575 different candy SKUs from 413 different brands, compared to beverages, where there were only 863 individual SKUs from 134 brands.”

The smaller brand landscape leads to a more limited product choice and availability, the analyst said. “That’s one of the reasons that could explain this sort of disparity in why beverages come in fourth when looking at share total of overall sales,” he said.

U.S. GROWTH: The firm also forecasted the total cannabis beverage market in the U.S. to reach $277M in 2023 and grow to $381M by 2027. “Our market forecast as to cannabis beverage sales is a subcomponent of BDSA’s overall U.S. legal cannabis forecast,” Mitchel-Chesebro said. “That’s driven by our own tracking of retail sales markets, which account for roughly 70% of U.S. sales, as well as from other data sources in the markets that we don’t track.”

He noted the company’s tracking provides deep category level details within the bulk of U.S. legal cannabis markets and BDSA estimates high-level category breakdown within tracked markets via comparable markets. “We take that to go along with the most recent trends and key analogy data taken into mind to draw that beverage forecast out to 2027,” the analyst said.

MARKET GROWTH: BSDA noted cannabis beverages grew their share of equivalent edible unit sales by 3% from April 2022 to April 2023 in California, and in Michigan, cannabis beverage dollar sales grew a staggering 87% between 1Q22 and 1Q23. “A big component of that growth is just the expansion in the number of brands that are offering beverage products,” Mitchel-Chesebro said. “Beverages are growing significantly faster than the total edible category, which has grown its dollar sales about 50% between 1Q22 and 1Q23.”

He added the number of distinct beverage products available at retail has roughly doubled over the period, from 36 in 1Q22 to 63 in 1Q23. “For California, part of the growth might also be in pricing,” the analyst said. “The price compression has affected all aspects of the industry, but we do see that beverages hold a lower average retail price in the total edible category. That might be a factor that plays into growth.”

Consumers are very price-motivated when making their product choices, he said, and beverages on average across all the markets BDSA tracks are about 29% lower than the aggregate of the total edible category. “One thing that beverages have going for them is that they are a familiar form factor,” Mitchel-Chesebro said. “Gummies have this benefit as well. That’s why we’re seeing more consumers report past six month consumption of a gummy edible than they do flower, even though flower is a much bigger share of dollar and unit sales.”

He said markets that have expanded retail access are going to have more newer consumers coming online, potentially leading to beverage sales growth. “Customers who aren’t as comfortable or familiar with consuming concentrates or flower, a lot of them are going to be looking towards edible products as their initial foray into cannabis,” the analyst said. “Beverages do present an approachable format, especially with all the various low-dosage beverages available.”

SUBCATEGORIES: Across BDSA-tracked markets, drinks were the leading beverage subcategory, making up 75% of dollar cannabis beverage sales in 1Q23, followed by mixes with 10%, and Mitchel-Chesebro said this is due to the familiarity of the form factor. “Our consumers insights data also shows that taste and flavor are some of the most significant factors driving the dominance of the drink category, when we’re talking about beverages specifically,” he said. “55% of beverage consumers claim that taste and flavor is a main driver of cannabis beverage purchases and of cannabis purchases.”

The analyst added while 10% of dollar cannabis beverage sales for mixes may not seem significant, there are markets where powdered mix products are closer to 30% of sales. “Colorado, 28% of the total beverage dollar sales is made up of this powdered mix category,” he said. “A big component of that is the convenience that they offer. Looking back at our consumer insights data, 28% of beverage consumers cite ease of use as a driver of their beverage purchase. Portability and convenience are also cited by 16% of beverage consumers as a major purchase driver, which is something this segment does better than almost every other beverage form factor.”

Mitchel-Chesebro said he sees a lot of potential in the powdered mix category as consumers move towards beverages for specific need states. “One thing probably holding it back from meeting its full potential is the limited availability and the limited number of brands offering mixes,” he said. “Across BDSA tracked markets, there were 123 products in the powdered mix subcategory from 31 different brands and over that same period, drinks had 567 products from about 76 brands.”

The analyst noted brand and product familiarity is consistently a big driver for consumer product choice. “Once more brands that already have high recognition branch out into the powdered mix form factor, I think it is possible that powdered mix products will grow their share of total beverage sales and total edible sales,” he said. “I think it’s especially true when we talk about the convenience that they offer and how these powdered drink products are ideally geared towards the more active or social need states associated with beverage consumers.”

BRAND BUILDING: BDSA said brands entering the beverage space with a data-driven approach stand to see huge gains from earning a significant share of cannabis beverage category sales. “There’s a few things brands can do to position themselves for success,” Mitchel-Chesebro said. “One of the things brands can do prospectively is target the need states of the consumers who might be looking for these beverages. Being clear to consumers about what benefits the product can offer does a whole lot driving sales and driving brand loyalty.”

He said BDSA has also found that roughly 30% of consumers claim they are willing to pay more for products that offer specific effect benefits. “The mood and effect can drive consumers to buy products that are at higher prices,” the analyst said. “Another way to really win in the beverage category is to focus on distribution as there are some ways in which beverages, particularly drinks, offer logistical challenges.”

Drinks are heavier than other beverage form factors and may require refrigeration at retail, he said, which presents more costs for retailers. “Brands that focus on having this wide availability within their given market have seen really strong growth,” Mitchel-Chesebro said. “For example, there is Uncle Arnie’s, which has been active in California for a while, and they have seen massive growth. Their dollar sales grew four times year-over-year between 1Q22 and 1Q23 and a lot of that is due to the massive expansion in retail availability.”

SAFE BANKING: In April, Oregon’s U.S. Senator Jeff Merkley along with Montana’s U.S. Senator Steve Daines introduced the bipartisan Secure and Fair Enforcement Banking Act of 2023, which looks to ensure that legal cannabis businesses have access to critical banking and financial services. “The impact to the industry would be really huge, if passed, and it goes beyond just the aspect of banking,” the analyst said. “People in the industry will have access to more capital as less people will feel hesitant to invest or get involved in the industry because there is this stable financial situation overall.”

The passage would also save industry players money on things like financial service fees, security costs and personnel costs, he said. “Managing as much cash as a lot of dispensaries do really does pose a risk, so that’ll have a dramatic effect if this does pass,” Mitchel-Chesebro said. “It’ll also open up retailers to accepting payment options other than cash and third-party credit card payment providers.”

He cited the Act’s 42 co-sponsors in the Senate as well as Senator Charles Schumer’s comments about making progress on the reform, however he sees the chances of it passing as relatively low. “There’s still ongoing disagreement among the members who have signaled support because of the fine print that is happening,” the analyst said. “We’ll have to see how it plays out, but we’re not super bullish on it passing this time around.”

CHALLENGES: When asked about the largest hurdles facing the cannabis space, Mitchel-Chesebro pointed to price compression, access to capital, regulatory uncertainty and the illicit market. “Price compression is on a lot of people’s minds,” he said. “It is impacting profitability, retailers’ ability to pay their vendors and some businesses ability to even make payroll on time.”

The analyst stated access to capital and financial services also remains a big issue. “Some of those issues would be solved by the Safe Banking Act,” he said. “But we’re not sure when that actually is going to be passed and when the effects of that are really going to be felt in the industry.”

Regulatory uncertainty is also always an issue, Mitchel-Chesebro said, as rules are rapidly changing in the space. “Even regulators in some mature markets have been working towards adjusting rules and tax structures to help the struggling licensed operators,” he said. “An example of this would be California, which has made some efforts to tweak its cultivation tax schedule and tweak some of the other fees businesses have to deal with. But these changes are often very slow to happen.”

Some markets are also dealing with illicit competition, the analyst said, which is a big barrier to growth. “California has had an issue to varying degrees since the market launched and New York is currently grappling with this,” he said. “There isn’t much indication that the enforcement efforts that they are going through are going to have a significant effect in the short-term, until they really ramp up availability of legal retail establishments.”

OPPORTUNITIES: As the cannabis sector develops, Mitchel-Chesebro said he sees the biggest opportunities in products geared towards specific need states, use of minor cannabinoids and emerging cannabis markets. “Mood and effect-marketed products, products that are marketed toward a specific need state like sleep or pain relief, have a lot of potential to see huge growth,” he said. “There is a lot of potential for consumers to really like those products and go back to them, building brand loyalty.”

Products with minor cannabinoids also show a lot of promise, the analyst said. “We’ve seen CBN products see huge growth in the past couple of years,” he said. “These products are geared heavily towards the sleep need state and we’ve seen consumers really accept these. The growth of these products as far as dollar sales and unit sales has been incredibly strong. There are a lot of opportunities to branch out to new minor cannabinoids that can help gear products and deliver repeatable benefits for other need states.”

Looking on a more macro level, Mitchel-Chesebro said he also sees opportunities in emerging and developing markets particularly in the Midwest and the East Coast. “New York saw a slow launch in a lot of ways, it was kind of messy and rushed,” he said. “But with the population that they have access to and the amount of tourists that come to these areas, we think there is huge opportunity for growth in these emerging markets.”

CANNABIS/PSYCHEDELIC STOCKS: Publicly-traded companies in the space include Aleafia Health (ALEAF), Acreage (ACRHF), Atai Life Science (ATAI), Audacious (AUSAF), Aurora Cannabis (ACB), Avant Brands (AVTBF), Awakn Life Sciences (AWKNF), Ayr Wellness (AYRWF), Body and Mind (BMMJ), BZAM (BZAMF), Cannara Biotech (LOVFF), Canopy Growth (CGC), Chicago Atlantic (REFI), Clearmind (CMND), Clever Leaves (CLVR), CordovaCann (LVRLF), Cresco Labs (CRLBF), Cronos Group (CRON), Columbia Care (CCHWF), Compass Pathways (COMP), Curaleaf (CURLF), CURE Pharmaceutical (CURR), CV Sciences (CVSI), Cybin (CYBN), Delic Holdings (DELCF), Delta 9 (DLTNF), Entourage Health (ETRGF), Enveric Biosciences (ENVB), Fire & Flower (FFLWF), Flora Growth (FLGC), General Cannabis (CANN), Greenlane (GNLN), Green Thumb (GTBIF), GrowGeneration (GRWG), Goodness Growth (GDNSF), Hemp (HEMP), HEXO (HEXO), High Tide (HITI), India Globalization Capital (IGC), Indiva (NDVAF), Innovative Industrial Properties (IIPR), InterCure (INCR), IM Cannabis (IMCC), Wellbeing Digital (KONEF), Khiron Life Sciences (KHRNF), Lowell Farms (LOWLF), Lotus Ventures (LTTSF), MediPharm Labs (MEDIF), MedMen (MMNFF), MindMed (MNMD), NewLake Capital (NLCP), Numinus Wellness (NUMIF), Organigram (OGI), Planet 13 (PLNHF), Reunion Neuroscience (REUN), Revitalist (RVLWF), RIV Capital (CNPOF), Relmada (RLMD), RYAH Group (RYAHF), Safe Harbor (SHFS), Small Pharma (DMTTF), SNDL (SNDL), Sproutly (SRUTF), Skye Biosciences (SKYE), Stem Holdings (STMH), Sunniva (SNNVF), TerrAscend (TRSSF), Tetra Bio-Pharma (TBPMF), Tilray (TLRY), Trulieve (TCNNF), Tryp Therapeutics (TRYPF), Verano (VRNOF), Village Farms (VFF), Wesana Health (WSNAF), Zynerba (ZYNE) and 4Front Ventures (FFNTF).