July 17, 2020

UK CBD market facing shake up as prices drop and premium CPG brands set to emerge

4min read

Over the last two years, the UK CBD market has enjoyed low barriers to entry, a lack of regulatory standards and extremely high premiums for inconsistent high street products.

July 17th, 2020

Eoin Keenan


 

However, consumers are advancing their knowledge of CBD and expecting a higher-grade product in return for their investment. With the introduction of real consumer brands on one side and budget brands on the other, along with the inevitable shift away from oils and higher standards across the board, is the age of high margins and poor quality products finally behind us?

A combination of consumer interest, changing legislation and the growing base of knowledge around CBD has led to a rapid increase in CBD sales over the last three years, with poor quality products retailing for a premium. However, the fall of raw material prices, as a result of the immense development of global hemp cultivation, is driving the commoditization of CBD, eroding producers margins and encouraging the emergence of new brand-led value propositions and value added products like CBD-infused food, drinks and cosmetics.

UK market beginning to diverge

Despite the UK being the largest CBD consumer market in Europe, the cultivation of hemp for both CBD and industrial use is comparatively small, estimated at under 1,000 hectares, compared to 50,000 hectares in the US or 18,000 hectares in France. While CBD in the UK is imported owing to restrictions on extraction, analysis from our proprietary price database shows that the evolution of retail prices in the country is more nuanced than what international wholesale prices may suggest.

High-demand categories, like oils and tinctures, have experienced a fall in price per item over the last 12 months. This reflects the strategy of a growing number of producers to cut their prices in order to compete and stand out in this increasingly crowded marketplace. At the same time, we’re observing an increase in the average price of value-added infused products, like edibles and topicals. This would appear to mark a fork in the road of the CBD market as producers are choosing between a pathway of price undercutting and commoditisation or taking steps toward the added value of brand development.

For a full breakdown of global CBD pricing and access to the Prohibition Partners CBD Wellness Index, please contact our consultancy team.

Quality and branding to shape new phase of development

The association of CBD with ‘expensive’ is nine percentage points higher among oil users than in all consumers, despite oils being the cheapest category in terms of cost per mg of CBD.

Conversely, consumers of more expensive formats in terms of CBD content, like topicals and food, aren’t as bothered by the price of CBD, given that these formats usually involve more value propositions than the price tag or CBD content. There is an underlying trend of premiumisation in the infused-goods market, with some topicals approaching a price of £0.8 per mg of CBD in 2020 which is several times larger than most price points in the category.

The division of the market, however, does not only run across product formats. Our data shows an expansion of price ranges in 2020. While many players have continued to slash prices to keep up with competition, we are seeing the emergence of a differentiated strategy by some operators, seeking to leverage their quality certifications and superior branding for a higher price tag, instead of competing in a fight over price in an undifferentiated market.

This trend is also starting to reach the upstream segments of the industry and will eventually lend itself to including the consumer in the full story of production, making provenance and appellation a major area of development which will bring some value back to the sourcing of raw materials in the future. This is a trend we’ve seen within the Californian cannabis industry, with the introduction of the CalCannabis Appellation Project. With premium CBD brands increasingly referring to their place of origin we expect to see appellation influencing the UK CBD space in the coming years.

Global prices fall despite rising demand

Further afield, industry sources in the US report that in 2020 hemp biomass is being sold at a price range of US$7-US$40 per pound, compared with US$34-US$75 in 2019 with CBD isolate also experiencing a similar price drop over the past 12 months. The growing CBD market has attracted hemp cultivators around the world, and this has resulted in supply now outstripping demand, with a wave of new cultivators in North America, Latin America, Eastern and Southern Europe entering the market.

The easing of the restrictions that are placed on hemp businesses, in terms of access to finance, movement of goods and the legislation that dictates supply and sale across global borders has contributed to this trend. Combined with the economies of scale that are now being applied by the larger vertically integrated operators who are emerging in the market, the cost of CBD production is falling and some consumers are likely to continue to feel the benefits of this, even if the cultivators don’t.

However, price drops have been implemented in the face of growing consumer demand and not because sales have started to slip. According to Prohibition Partners proprietary consumer research, the majority of users in the mature markets of the US and Canada expected to maintain their current usage patterns (54%) as a result of COVID-19, while another 29% expected to use more. In the emerging European market the figure for maintaining or increasing current CBD levels was slightly lower at 48% and 28% respectively.

With demand expected to increase, brands need to adapt to the new CBD consumer, focusing on product innovation and the importance of brand-led marketing, which is expected to shape the next phase of the market as consumers move on from the juncture of discovery to one of discernment. Like all CPG markets that have come before CBD, the future winners will almost certainly be decided by the strength of their brand and the quality of their products.

For more in-depth information, consumer data and strategic support, contact the Prohibition Partners consultancy team at info@prohibitionpartners.com or download one of our industry-leading reports.

 

UK CBD market facing shake up as prices drop and premium CPG brands set to emerge

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