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Hill Street Beverage Co. is turning to third-party manufacturers to make its infused beverages, three weeks after abandoning plans to buy a late-stage LP applicant, the company said Monday.

The Ontario-based maker of non-alcoholic beverages dropped plans to buy Regina-based OneLeaf Cannabis Corp. in early October after failing to raise the capital needed to finish OneLeaf’s facility and outfit it with a bottling line.

The fact that Hill Street can chart a path forward after nixing the deal points to an important trend: the emergence of white-label manufacturers of infused beverages.

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In May, when Hill Street announced plans to acquire OneLeaf, there were no companies offering beverage co-packing services, said Terry Donnelly, CEO of Hill Street. That has changed dramatically in recent months.

Truss Beverages Co., the joint venture between Molson Coors Canada and HEXO Corp., announced its first white-label agreement last week with Flow Glow Beverages Inc., an offshoot of Flow Alkaline Spring Water. In September, Valens GroWorks Corp. announced a five-year contract manufacturing agreement with Iconic Brewing.

Various late-stage applicants, including BevCanna Enterprises in B.C. and Molecule Inc. in Ontario, are also advertising their services formulating, manufacturing and shipping infused-beverages.

All told, Mr. Donnelly said he’s spoken to a dozen or so companies – both licensed and late-stage applicants – that are offering to make and bottle cannabis-infused beverages on a fee-for-service or revenue-sharing basis.

The emergence of co-packers has been a godsend for companies like Hill Street, whose largest investor is a wine packaging company called VinFirst Innovative Packaging.

Hill Street’s initial plan had been to use VinFirst’s manufacturing facility. However, this was stymied by Health Canada regulations prohibiting the manufacture of cannabis and non-cannabis food in the same facility.

“We were only pursuing that [LP acquisition] avenue because we had no place to make our product,” Mr. Donnelly said.

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Although the company has yet to sign any white label agreements, it’s a model familiar to people from the alcohol industry.

“I’d say to a co-packer, ‘I want to use this barely, this yeast and this kind of hops, and make me this beer, put my label on it, and send it to the LCBO,’" Mr. Donnelly said.

Cannabis co-packing will be similar: “I contact an LP who has a particular strain of cannabis I’m interested in using in my wine; I have them send that to an extraction company; the extraction company turns it into oil; I have those folks send it to the beverage co-packer; they process the oil into my infusion material, and put it in my bottles and cans, then they send it to the wholesaler,” he said.

Emma Andrews, the chief commercialization officer at BevCanna, said she’s seen a surge in interest in her company’s co-packing capacity over the past few months. BevCanna is a late-stage applicant near Osoyoos, B.C. that is re-purposing part of an existing water bottling facility for cannabis beverages.

“The vertical integration model doesn’t hold true any longer in cannabis, because we’re getting into such specialized product types,” Ms. Andrews said.

BevCanna bottling facility in Osoyoos, B.C.

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Although it’s still waiting on a processing licence, BevCannana has a research licence from Health Canada and has begun working with white-label clients on product formulation.

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“We need to vet the ingredients that our partners have found. Not everything stays stable once you scale to a commercial bottling line... The ingredients might separate or create a film or foam or froth once you put it into the industrial mixer,” Ms. Andrews said.

BevCanna has partnered with NextLeaf Solutions in Coquitlam, B.C. , which will process cannabis biomass into water-soluble cannabinoids and send them to BevCanna to be mixed into beverages and bottled.

The model differs for other white-label manufacturers. Valens, for instance, plans to do most of the extraction itself for beverage products.

The company – which is one of the leading contract extraction firms in Canada – has acquired a process for making water-soluble cannabinoids through a partnership with Seattle-based Sorse Technology, although it has yet to secure an industrial scale bottling facility, said Valens president Jeff Fallows.

As for how the revenue model works for beverage co-packers? That depends on how much work the manufacturer needs to do, explained Mr. Fallows. Most of the time it will be fee-for-service, although there may be some revenue sharing agreements.

“If [the client is] an LP and they have their own products, the chances of them doing a revenue sharing agreement are lower. But if you look at somebody who is a non-licensed party who is trying to get a cannabis drink on the market, there would be an opportunity for us to move that sort of arrangement to a revenue share,” he said.

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Editor’s note: An earlier version of this article stated that Valens developed its own process for creating water-soluble cannabinoids. In fact, Valens is licensing this technology from Sorse Technology, a Seattle-based emulsion company.
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