Food entrepreneurs Chris and Peter Neal, best known for Neal Brothers chips and salsa, have teamed up with Newstrike Brands Ltd. in the first publicly announced deal between an established Canadian food company and a cannabis grower.
The joint venture will see Neal Brothers Brands Inc. and Newstrike cooking up cannabis-infused goodies in a kitchen in Newstrike’s facility in Grimsby, Ont.
“Whether it’s chocolate, confectionery or a mix of salty snacks, everything is open right now. As soon as we know what the [regulations] are, we will start paring down,” said Peter Neal, co-owner of Neal Brothers and a prominent figure in the artisanal snack food industry.
Cannabis edibles aren’t expected to be legal until the fall of 2019 – a year after marijuana flower and oil – because of the federal government’s two-step approach to legalization. Health Canada will publish draft regulations for edibles “later this year and into 2019,” a department spokesperson said. That has not stopped companies from developing recipes and partnerships to position themselves for the next leg of marijuana legalization, which will focus on higher-margin products and new types of customers.
To date, these partnerships have centred on infused beverages, as with Canopy Growth Corp.’s partnership with liquor giant Constellation Brands Inc., or CannTrust Holdings Inc.’s venture with Club Coffee LP.
More deals like the one between Neal Brothers and Newstrike, however, are expected in the coming year, as companies look to the United States, where infused gummies, chocolates and candies are emerging as bestsellers.
For TSX Venture Exchange-listed Newstrike, which owns the Up Cannabis brand, the move into edibles was an obvious one in light of consumer trends in established markets.
"There’s limited market data here in Canada, but we certainly look to the experiences we’ve seen in the U.S. where consumption [has moved] from dry bud into edibles and derivative products … very quickly, in some cases above 30 or 40 per cent in the course of a couple of years,” said Jay Wilgar, Newstrike’s chief executive.
According to data from market research company Headset Inc., edibles make up between 8 per cent and 13 per cent of aggregate legal dispensary sales in Colorado, California, Nevada and Washington, the four states Headset monitors. Around a third of legal cannabis buyers in those states tried an edible product in the last year.
“Once they’re an edible consumer, we’re noticing that about one-fifth of their total cannabis spend is going to edibles,” Headset chief executive Cy Scott said at a cannabis trade show in Las Vegas earlier in November.
If legal U.S. markets are anything to go by, the Canadian edibles market will become crowded quickly.
"I’m not overly surprised you’re seeing this [deal] ahead of the regulations. In this industry, you’ve got to move fast, and there’s only so many really great partners to partner up with,” said Ranjeev Dhillon, co-lead of McCarthy Tétrault LLP’s national Cannabis Law Group.
Mr. Dhillon said he’s seeing plenty of edibles partnerships being discussed, with cannabis companies speaking to artisanal food producers, craft brewers and even large blue-chip food companies. “Everyone is at least trying to kick some tires and figure out who is available to partner up with," he said.
Chad Finkelstein, a partner with the law firm Dale & Lessmann LLP and an adviser to the industry group Restaurants Canada, echoed this: “There are food entrepreneurs who are developing relationships or partnerships with labs that have their [cannabis] dealer’s licence … [and others] who are going out and acquiring black- or grey-market edibles producers … mostly to get the goodwill and the recipes.”
For Neal Brothers, the decision to stake a claim in the cannabis space has produced a certain amount of anxiety, Mr. Neal admitted. The company has carefully created a community-centred, health-focused image through organic food, partnerships with celebrity chefs and cookbooks. Still, the opportunity proved too compelling to ignore, particularly for a company known for niche food products.
"Sure, we could be turning off some of our consumers, but we could also be attracting new consumers who believe in what we’re doing. ... We’ve spoken to dozens of people, we’ve spoken to our families, we’ve spoken to employees and we’ve had little to zero pushback,” Mr. Neal said.
The joint venture will be 60 per cent owned by Newstrike and 40 per cent owned by Neal Brothers. Newstrike also took a minority equity stake, of an undisclosed size, in Neal Brothers.