CBD brands struggle as cannabis trend runs out of puff

Tony Calamita has visited every big bank, but not one will let his company open an account; they all fear being implicated in money laundering. He is no drug lord, however. Calamita runs Love Hemp, a listed business selling food, oils and pills containing cannabidiol (CBD) at shops on the high street including Holland & Barrett.

CBD is an active ingredient in cannabis. It has exploded in popularity in recent years amid claims — unverified by medical authorities — that it helps to reduce anxiety, insomnia and chronic pain. Unlike THC, the psychoactive chemical in cannabis, CBD does not get you high. And it is legal.

Love Hemp floated on the pan-European Aquis Stock Exchange, based in London, in September 2019. Last year, it signed up heavyweight boxer Anthony Joshua as its brand ambassador.

“We’re a publicly listed company fronted by Anthony Joshua. Yet we still struggle to get a bank account with a high street bank. This is the world we live in,” said Calamita, who has given up trying.

“Our product is legal — we’re totally legitimate in everything we do — yet you feel persecuted.”

It is a familiar tale in the cannabis sector, which is being choked by increasing regulation, strict rules on advertising and waning appetite for the products.

A few years ago, the hype around it brought a wave of start-ups looking to cash in on the nascent sector and trying to tap City backers eager to invest. However, it is starting to look like the dreams of many budding British entrepreneurs — and a few cowboys — will go up in smoke.

The change in attitudes towards CBD is evident in Love Hemp’s stock market performance. The shares have tumbled from above 6p a year ago to below 1p, valuing the company at just £10 million.

Cellular Goods, another CBD company, floated on the main market a year ago to plenty of noise — helped by the backing of former England football captain David Beckham, who has a 5 per cent stake. The shares initially surged from their 5p float price to 13p, but have since dropped back to below 4p.

The health and beauty company launched its first range of products only in December: CBD-infused creams, sprays and tablets. This month, it launched a “rejuvenating” face serum for £99. But in February, Cellular warned that demand had already proved lower than expected. It also suspended sales of its £59 after-shave moisturiser because it had failed to meet quality standards.

A retail investor who put money into the all-share Vanguard Total Market Index exchange-traded fund (ETF) at the start of 2018 would have made a 62 per cent return on their investment. By stark contrast, an investment in the ETFMG Alternative Harvest ETF, which was the first listed fund investing in cannabis stocks, would be worth a quarter of its value after a 74 per cent collapse.

Canada blazed a trail when it legalised cannabis in 2018, and it is home to some of the world’s largest CBD companies. But they too have suffered. Canopy Growth recently lowered its profit guidance and its shares have plunged 80 per cent in a year. The 98 per cent share price collapse of Hexo is even more dramatic, with the company forced to lay off staff. Shares in Tilray Brands, meanwhile, have dived by 78 per cent in 12 months.

“The Canadians all came over in 2018 on the back of their booming market,” explained Gavin Sathianathan, chief executive of the cannabis research company Alta Flora. “It felt like that was when Europe got to the start line for cannabis.

“But for CBD, it was a false start. People started running and now they’re coming back. The regulator said we need to impose some standards and have some clear directions on how marketing claims are made.”

In the wake of the CBD boom, the UK’s Food Standards Agency (FSA) decided to regulate the sector to ensure the safety of products on the shelves — none of which is currently authorised by the regulator. That means any product can be removed from supermarket shelves or websites by local authorities, who enforce food laws.

The FSA set a deadline of March 2021 for companies to get in their applications. It has received 927 novel food applications for CBD since the start of January 2021 and is understood to have rejected a large percentage of those already because they did not include basic information such as toxicity levels. The preliminary list will be released in the coming weeks.

Those that have not made the cut will most probably have their products removed from sale by local councils. Those that clear the first hurdle will then need to go through a rigorous scientific vetting process, meaning none will be authorised until next year at the earliest.

Rebecca Sudworth, director of policy at the FSA, said it had opted to take a “proportionate” approach to regulation by working with companies, instead of removing products before the authorisation was complete. Despite the lack of regulatory sign-off, some grocers, such as Sainsbury’s and Ocado, are already stocking CBD products on shelves. Amazon and eBay are also operating pilot UK programmes.

Holland & Barrett stocks the most products on Britain’s high street, with more than 200 different items from oils to sprays and capsules to drinks. The retailer said all its CBD suppliers go through internal checks “to make sure the CBD products that they retail are traceable from source, safe to market and have been analysed for quality and purity by laboratories before they go on our shelves”.

But the FSA’s Sudworth said: “We’ve been very clear with retailers that these are currently unauthorised products. So what they don’t have is that FSA backing that says we’ve gone through a process, looked at the evidence and we’re clear that these are safe. It’s always the responsibility of the food business to make sure what they’re selling is safe. We’re pleased that many have been more cautious. We would rather people follow the regulatory process.”

Many start-ups are frustrated by the regulator’s slow approach, which they claim is preventing retail tie-ups and forcing investors to hit the pause button. “Investors are like, ‘Why would I keep putting money into this when the regulators aren’t that motivated to do something?’ ” said Stephen Murphy, chief executive of the cannabis industry data group Prohibition Partners.

Advertising rules are also very strict. Companies are not allowed to make any health claims about what they perceive to be benefits from CBD. Only pharmaceutical cannabis-based companies that go down the expensive medical-testing route will be able to make such claims.

“Most modern start-up businesses are heavily reliant on performance marketing,” said Eoin Keenan, who runs Goodrays, which makes CBD drinks and oils. “The reality is, if you can’t advertise your core benefit then there’s very little point in doing it. It’s massively problematic and limiting.”

The Beckham-backed Cellular Goods blamed its slow sales on rules that ban the advertising of CBD products on Google and on Facebook owner Meta, which dominate the online ad market. The company’s chief executive, Anna Chokina, said: “It appears these platforms do not want to have to go to the trouble of working out what is legal and what is not; it is just easier for them to say no, however unjustified that may be.”

It is clear, though, why some platforms are nervous about allowing brands to promote their products. During the pandemic, a number of CBD companies made claims that their products helped to tackle Covid — prompting regulators to intervene. One company, the London-based Nova Botanix, was told in April 2020 by the US Food and Drug Administration to remove a number of claims that it had made on its CanaBD website.

Those claims included: “CBD oil may help to prevent getting infected by strengthening your immune system. It has also been proven to offer relief to some of the symptoms.”

Nova Botanix has since been dissolved on Companies House, but the CanaBD website is still operating.

In 2020, Calamita launched a product line called Love Hemp Immune and promoted it on Facebook and Instagram with the tagline: “Covid changed the world, so we changed our plans. Love Hemp Immune.” It didn’t take long before the UK’s Medicines and Healthcare products Regulatory Agency (MHRA) came knocking. The watchdog sent him an email demanding he remove the ad within 48 hours.

The advertising picture is complicated by long-standing doubts about the alleged benefits of CBD, with no central regulatory body backing up those claims. The MHRA advises people using CBD products to treat or manage symptoms of medical conditions to seek advice from their doctor.

Meanwhile, the sector has attracted a celebrity sheen. A number of boxers, such as Joshua, have got behind CBD since the World Anti-Doping Agency removed it from its list of banned substances in 2018. Singer Beyoncé is building a hemp farm after discovering CBD on her last tour, while rapper Snoop Dogg co-founded a cannabis investment firm to back companies in the sector.

Calamita said the Food Standards Agency’s authorisation process was “an incredible source of frustration and tension between the industry and regulators”. But he added: “It’s going to whittle out the cowboys, and unfortunately there still are many in the UK.”

Olivia Ferdi, who runs the London-based CBD company Trip with her husband, Dan Khoury, said brands that were investing in compliance and testing would “continue to be endorsed by the right retailers and investors to have longevity”. She continued: “If you’re a cowboy, you run out of money quickly.”

The industry clampdown has put the brakes on some of the rapid growth forecasts that were around a few years ago. Prohibition Partners predicts that the UK’s CBD market will shrink every year from 2022 until 2026 — from $573 million (£431 million) this year to $530 million in four years’ time.

Murphy at Prohibition Partners puts it down to two things: products being pulled from the shelves and waning interest from customers who will move on to the “next trendy wave”.

“I do believe the initial hype of CBD may have helped amplify the initial interest in it, which may not be sustainable,” said Murphy.