Are CBD brand casualties a necessary evil for investor confidence?

Love Hemp’s decision to call in administrators on 9 February has capped off a troubled time in CBD. Since the Food Standards Agency published a whitelist of tradeable products last April, many brands have run into difficulties.

Joining Love Hemp among recent casualties is 1 Step, a CBD brand supplied by JM Wholesale. After the FSA removed it from the whitelist in late January, the brand’s edible products were withdrawn from sale. And last week, Cannaray’s planned reverse takeover of Cellular Goods collapsed over the latter’s recent share price decline. Known for being backed by David Beckham, Cellular was forced out of edible CBD last April for its failure to comply with the FSA rules.

It makes for a Darwinian atmosphere in the CBD market. But is it the kind of cleaning up the once-unregulated category needs? Or will these high-profile flops undermine retailer, consumer and investor confidence?

When it comes to improving safety, there is widespread agreement that the whittling down of CBD companies will strengthen the category. As Association for the Cannabinoid Industry (ACI) director Steve Moore puts it, “a diverse range of companies” emerged in the period prior to the FSA’s novel foods regime.

Now he’s satisfied that “only the best managed companies practising good governance” will survive. This is because companies have had to signal clear intent to provide toxicology data to remain on the market, he says, “which is bound to flush out many of the early market entrants”.

It’s been a bruising process, but CBD One brand director Alex Tofalos is among those grateful. “The CBD industry was in desperate need of some serious quality control and regulation to stop the influx of low-quality and potentially unsafe products making their way into consumers’ hands,” he says.

In some respects, enforcement may not be strong enough. Tofalos claims some brands which didn’t exist on 13 February 2020 – the point at which the FSA sought to pause the market and stop new launches – “have somehow made it onto the list with various products”. “These should not be there,” he adds.

Deterred investment

Better compliance should reassure consumers, investors and retailers alike. Unfortunately, the chaotic implementation of the FSA’s whitelist, which has grown to 12,000 products from an initial 3,500, has stoked confusion and fear.

“One thing we have been surprised about is the lack of knowledge, and sometimes the fear, the food and drink market has when it comes to working with a CBD product,” says Tofalos. Even though supermarkets often stock CBD products, CBD One has found wholesalers, coffee shops and cocktail bars are “sometimes still hesitant” about the category.

“We have come across various companies who wanted to explore CBD, but decided against it because they believed it to be too much hassle. This is mainly due to unfounded concerns,” Tofalos adds.

Even the compliance questions his company has fielded betray a lack of knowledge of the subject, Tofalos says. In one conversation, CBD One was asked for its hemp grower’s licence, which is not a requirement for a CBD brand.

Most also acknowledge competition and innovation has been stifled for now by the FSA’s rules. “Competition should have waned a bit because there’s now a barrier to entry. You can’t just go and create CBD products and put them straight on the shelf,” says James Wright, founder of the Cheerful Buddha brand.

Yet while the number of market participants has decreased, this isn’t true in terms of consumer numbers. An ACI survey from last June showed almost a fifth of British adults had used CBD or cannabis oil for medical reasons, and the numbers were trending up. “This could incentivise investment in compliant brands,” Wright says.

And the ACI’s Moore expects current constrictions will ease. Full authorisations for the FSA list are expected this year, which “should revivify the market, boost consumer confidence and derisk the category for investors”.

“The regulatory process concluding will cement the UK as the global centre for consumer cannabinoid research and development,” he adds.

If Moore is proved right, it would justify the casualties.