Will regulating CBD as a food ingredient help drive investment into the category?

NutritionInvestor analyses the potential investor opportunity and considers the implications for those investing in banned products
Will FMCG investors flock to the CBD space once regulations are finalised next year?

As a functional food and wellness ingredient, Cannabidiol (CBD) has long been shrouded in uncertainty for both consumers and investors. Supported by very loose medicinal claims, consumers have been presented with the promise of reduced anxiety and better sleep upon ingesting CBD-infused food and beverages. 

But in an effort to legitimise a business that many investors in the F&B and FMCG spaces have dismissed, the Food Standards Agency (FSA) has taken its first step in regulating CBD by publishing a comprehensive list of products that have passed its toxicology requirements. 

Supported by the Independent Association for the Cannabinoid Industry (ACI), the move will see compliant products become fully verified by the regulator within the next year. ACI founder Steve Moore believes the move will drive innovation within the space as well as new investment. In the last two years, the ACI worked with many of the UK’s CBD companies on preparing the data required by the FSA to pass its guidance.

“We’re now in the middle of a process that will de-risk the product category for investors. At present, most of the category is sold in the form of oils, so it feels to me like there is a huge potential for fusing it with functional food and drink,” Moore tells NutritionInvestor following the announcement of the FSA’s initial list in April. 

According to data gathered by Kantar, the UK CBD market was worth just under £700 million in 2021, as overall sales grew 10% during the Covid-19 pandemic thanks to health and wellness becoming a priority for consumers. 

“It makes sense the product was resilient through the pandemic years, but the demographic shifted from older people to younger people,” Moore explains. There’s not a high-street retailer that isn’t selling these products in the UK.”

Amid the slew of products that have come to market in the last few years, some have been supported by celebrity endorsements, from TV personality Claudia Winkleman to golf pro Darren Clarke and UK boxing champ Anthony Joshua. But savvy consumers have come to realise that celebrity and social media influencer endorsements do not guarantee the legitimacy of a brand or product. 

“The whole sector has to date been too precarious for most [major food or supplement companies] to get involved in, particularly in the absence of regulation,” says Moore. “This absence of regulation has also coincided with lots of studies into what is in many of the hight-street offerings. The Daily Mail recently publishing an article which questioned CBD products.” 

The national newspaper funded a study in March which found a handful of high-street products did not contain the active amount of CBD that they claimed to. Within the article , Dr Steven Alexander, associate professor of molecular pharmacology at Nottingham University, said high-street CBD products may not have a high enough dosage to support claims that some could reduce inflammation and muscle pain. 

He also explained that CBD is not well absorbed by humans, with research showing that only 10 to 15% of the active ingredient made it into the bloodstream. By comparison, 60 to 80% of most pharmaceutical drugs are absorbed into the body. 

Interest from Big Food? 

With the category now cleaning up its act, Moore expects big FMCG corporates to enter once regulations are completed. “What we haven’t seen up to now is companies like Nestlé coming into the space, but I’m sure they’re coming quite soon because the barriers to entry for them are pretty low [compared to small businesses producing only CBD products],” he comments. 

Managing director for Canaccord Genuity’s Global Capital Markets business Alex Brooks, agrees with Moore on the inevitable entry into CBD from big FMCG groups. He says the barrier to entry in producing CBD is also low as the price of extracting the ingredient from hemp plants has dropped since 2020. Brooks says “risk-averse” FMCG players will consider the FSA’s list an idea entry point for moving into the category.

Brooks works predominantly with Big Pharma investors interested in cannabis for medicinal use. Canaccord Genuity’s Canadian wealth management business is a significant investor in recreational and medicinal cannabis within North America, but the UK Government has made it very clear they have no interest in pursuing this opportunity locally. 

Despite the UK being Europe’s largest CBD market from a product and investment standpoint, Brooks says the companies currently operating in the market are still too small for institutional investors to consider. He expects interest from institutionals to come about once companies are generating over £30 million in turnover. “Some,” he says, “are getting close to this point.” 

Interestingly, Brooks also expects the investment approach to CBD will differ to typical FMCG categories as he believes that marketing restrictions on products making any medical claims will force businesses to focus more on building a reliable brand than constantly churning out products. 

He says investment needs are different for businesses focused on brand building to those prioritising NPD. One such need is significant capital for marketing and customer acquisition. 

Richard Brick, principal for investment at consumer and retail focused investor True Global, also expects corporates to enter the CBD space in time. “Like protein did ten years ago, a new ingredient with functional benefits such as this affords teams to look at their NPD calendar and consider how things may be formulated in order to market specific claims,” Brick tells NI.

“It draws on interest from the consumer and allows such brands to relatively cheaply tap into trends – and also legitimises the broader industry in tandem.”

Brick is also of the opinion that institutional investor interest in the space will be limited as he expects regulation to be a relatively slow process.

Implications of non-compliance 

Brooks highlights the London-listed Cellular Goods as one company that is leading the charge in terms of growth and performance in CBD. According to Proactiveinvestors.co.uk, the company had raised £13 million in ‘new funds’ early last year, after launching its IPO in February 2021. At the time of writing, it has a market cap of £15.17 million with a share price of £2.99.

The company’s share price dipped 21% between 1 and 12 April after its ingestible CBD offerings were left out of the FSA’s initial list of commercially viable products. In a statement to The Times, Cellular Goods said it had consulted its supplier and was confident its products had met all current UK regulations. But, on 13 April it confirmed it was looking for further clarification from the FSA on whether its products actually passed the regulator’s requirements. 

Implications for businesses and investors with products that have not made the initial list could be serious. Canaccord’s Brooks says it is difficult to generalise when considering how this setback could affect investors, but he acknowledges that these companies will need to seek access to the list as early as possible. 

The ACI’s Moore explains that further iterations of the FSA’s list will be published in coming months and will include additional products that have been able to produce the necessary data. “We’ll watch over the course of the next year as these non-compliant companies will be removed from the market, and those that are compliant will go through the final authorisation process. In our case, our companies will move into the validated category by the summer or early autumn, and then the risk-assessment process could take anywhere between six months and a year,” Moore says.  

“By then the category will have become completely de-risked and CBD will be considered the same as any other food or nutritional ingredient. Let’s talk in a year’s time and see how much has changed,” he concludes.