Chips Ahoy and Cadbury chocolate maker Mondelez is the latest food and beverage company exploring the sale of CBD-infused snacks. Don’t expect to find CBD in Oreos or any of the company’s other “family brands”, but CEO Dirk Van de Put said on CNBC that they may include it in other offerings or new product lines. He thinks the ingredient will go mainstream in the food market in the “not-so-distant future”.
You’ve likely heard of a slew of new CBD products or even seen them at local retailers, but what exactly is it? A few points here:
- Compound: People tend to conflate cannabidiol (CBD) with marijuana because it is a natural compound in the cannabis plant. Unlike marijuana, however, it is non-psychoactive and does not produce a high like another compound in the plant known as tetrahydrocannabinol (THC). CBD can also come from hemp, a subtype of the cannabis plant that has negligible traces of THC.
- Effects: Many people believe CBD helps treat everything from pain/migraines, depression and seizures to anxiety/stress, insomnia and inflammation. There’s not much research to back up these claims given that it was illegal until late last year. Hopefully that will change now that it’s legal. Even still, the compound must have some merit given that the FDA approved GW Pharmaceuticals’ CBD medication Epidiolex last year, which treats two rare forms of childhood epilepsy.
- Products: CBD comes in several forms, including oils, tinctures, drinks, lotions, capsules, edibles (i.e. gummies), etc. There are also CBD products for pets to treat pain, nausea, anxiety, or seizures in epileptic animals. Just type CBD into your Amazon search browser and you’ll find numerous human and pet offerings, most of which look highly reviewed.
- Regulatory framework: When President Trump signed the 2018 Farm Bill into law late last year, he legalized the production of hemp and most hemp-derived products like CBD. That said, the regulatory structure is still getting worked out. The Food and Drug Administration bans companies from including CBD in food and beverages or from marketing it as a dietary supplement, for example.
This wrinkle is why Mondelez CEO Van de Put said while the company is getting ready to launch CBD-products in the future, they “obviously want to stay within what is legal and play it the right way.” So even though retailers, such as Walgreens, CVS and Whole Foods have already started selling CBD products like lotions and creams, food and drink companies like Mondelez are waiting on the FDA. As Van de Put explained: “It’s a bit clearer in non-food products. In food products, I’m hoping that the FDA will bring some clarity in the coming months.” The FDA said it would hold a hearing this month to start developing a regulatory framework for including CBD in consumer products, so we’ll keep you posted.
With that background in mind, here’s why we think CBD is an important disruptive market opportunity:
#1 – We think the pathway for CBD is clearer and closer than marijuana given that the compound is already nationally legal, unlike cannabis. The FDA implementing set rules should benefit the CBD industry as it will give large, established companies the greenlight. Some startups have ventured into the grey area with CBD-infused food and drinks, but a public company like Mondelez cannot do that.
CBD may also have broader reach than marijuana and a potentially larger total addressable market:
- While marijuana consumers skew to men and young adults, California marijuana delivery company Eaze found that “CBD is driving a new demographic of cannabis users” based on their usage data of 450k consumers.
- According to their report based on people in California: “CBD consumers nearly doubled in 2018, growing from 2.6% in 2017 to 4.8% in 2018. Baby Boomers are the most common CBD enthusiasts of all age groups (8.4% in 2018), and female Boomers are the most likely CBD users.”
- Granted, another recent survey by Cowen found that CBD use also skews towards those under the age of 35. But as public awareness grows, we believe the therapeutic characteristics of CBD may lend itself to more applications and appeal to a wider array of demographics than marijuana.
#2 – There are several vectors from medicine to beverages in which CBD-infused products could have a meaningful substitution effect. Here are just two examples:
- Rather than taking a pill for pain, insomnia or stress, people may prefer to use a natural remedy like CBD oil. In the Eaze report, it noted that CBD’s increasing popularity comes from consumers using it as a “wellness tool” for anxiety, sleep, pain relief and relaxation.
- When the FDA clears up regulations of CBD in drinks, we also think it offers beverage and liquor companies the opportunity to diversify their product offerings as sales for sugary and alcoholic drinks slow or decline.
#3 – Once regulations around CBD get settled, we agree with Mondelez’s CEO that it will go mainstream quicker than many realize, and we think not just in the food industry. The biggest surprise in Cowen’s recent CBD survey of 2,500 adults found that almost 7% had already used CBD, higher than their analysts anticipated. Consequently, Cowen thinks the CBD market could reach revenues of $16 billion by 2025 compared to estimated retail sales of between $600 million and $2 billion in 2018. And that’s a conservative estimate to take regulatory headwinds into account.
As for product demand: tinctures (liquid extracts) represented the largest piece of the market at 44% in Cowen’s survey. Topicals (26%) were next, followed by capsules (22%) and beverages (19%).
Bottom line, we believe the three biggest growth areas for CBD include 1) tinctures/oils and capsules 2) lotions/creams and hygiene/beauty products 3) and eventually food and drinks depending on the FDA. We understand that hearing public companies exploring the use of CBD may sound like they are trying to take advantage of the latest hype as many did with bitcoin. We don’t think CBD is a fad, however, but a new, disruptive market for many industries.