Two years in, Minnesota's THC market hasn't lost its buzz

At some liquor stores, THC outsells vodka. At some breweries, it outsells beer.

Minnesota has become the country's weed-drink capital, with cannabis-curious consumers spending at least $140 million on legal THC over the past year. Other states have taken notice; Iowa recently followed Minnesota in regulating hemp-derived THC products.

"Minnesota is, in some ways, the Silicon Valley of the hemp-derived economy," said Brian Vicente, founder of one of the nation's top cannabis law firms, Vicente LLP. "The brands of the future, I think, are being born in Minneapolis today."

Two years after the state legalized low-dose cannabis drinks and edibles, though, the market is pretty well saturated. Monthly sales have leveled off. Thousands of businesses are registered to produce or sell the stuff, and soon enough, hundreds of full-scale cannabis dispensaries will be popping up, offering more variety and much higher doses.

"Initially anyone could come out with a THC product and do well, but that quickly tapered off," said Dan Doran, brand manager at Lupulin Brewing. "Now, quality is at the forefront."

The brewery in Big Lake, Minn., now makes 30% of its revenue from its Smazey THC beverages, distributed across the state, and sales keep growing. The THC market is hardly losing its buzz, from Doran's perspective.

"The more people try it, the more they tend to stick with it," he said.

As THC moved rapidly from a nice-to-have novelty to a standard offering at liquor stores and breweries, the widespread adoption has de-stigmatized cannabis use and spawned a new social scene for the growing number of people drinking less alcohol.

"I continue to be pretty overwhelmed by how many people are saying that either them or a friend of theirs doesn't imbibe alcohol, but now they actually have something that they can go out and socially imbibe with their friends," said Bob Galligan, director of government and industry relations for the Minnesota Craft Brewers Guild.

But when dispensaries start opening next year, offering a full suite of cannabis products, will Minnesota's trailblazing hemp market lose its appeal?

"Guys that smoke weed aren't coming in buying 5-milligram gummies," said Tom Schoenberger, owner of Westside Wine & Spirits in St. Louis Park.

Instead, the wide availability of low-dose THC has fostered a new kind of cannabis consumer not typically served by dispensaries, where products trend toward high potency.

"Low-dose created its own niche, and there's this paradigm shift: People who want to stop drinking now have a legitimate alternative," Schoenberger said. "That market isn't going anywhere."

Winners and losers

Two years ago, customers spilled onto a St. Paul sidewalk outside Nothing But Hemp to buy the first fully legal THC edibles. Owner Steven Brown said demand has leveled off now that some 4,000 businesses have registered to sell hemp-derived products in Minnesota, so he's shifted away from direct retail to wholesaling.

But, Brown said, the hemp-derived market in Minnesota is due for a correction. With so many brands putting out similar products, many will inevitably fail. And it won't be due to competition from dispensaries selling buds, vapes and high-potency edibles.

Over the past two years, he said, he's noticed the hemp-derived market attracts a more casual consumer. They're more likely to sip on a low-dose THC seltzer at a bar or brewery than to go to a dispensary, he said.

"There's this huge audience that wants low-dose," Brown said. "I think the marijuana dispensaries are going to be specifically for the people who want high-dose smoke or dab."

National hemp-derived THC brand Cann, which operates in states with and without recreational marijuana dispensaries, sees a similarly spread-out Venn diagram of cannabis users.

"We believe that consumers in dispensaries and those in traditional retail have distinct needs, leading to minimal overlap," the company said. "The dispensary consumer is typically someone who is going in with a baseline education of cannabis and may be going in to buy hundreds of milligrams of THC."

Rachael Dillon, co-founder of Twin Cities-based brand Mary & Jane, said many of her customers aren't even looking for a cannabis product at all when they buy the company's Sunny 1-milligram "microdose melts."

"When people find our brand, their point of view isn't, 'I want to find a low-dose edible.' They see it as, 'This is a product that can do this thing for me,'" she said. "'It can replace my glass of wine.'"

A boon to craft breweries

Craft breweries have benefited from the THC-infused seltzer boom at a time when beer sales are declining. For some breweries, THC drinks now make up 15% to 25% of their portfolio, said Galligan with the Brewers Guild, who's also a member of the Hemp Beverage Alliance.

"I think it's been a pretty crazy but amazing two years," he said.

Indeed Brewing, one of Minnesota's largest breweries, quickly established itself as a top THC beverage-maker. The Minneapolis brewery offers four year-round THC beverages that now account for about 15% of Indeed's revenue, said Ryan Bandy, the brewery's chief business officer.

THC drinks have revolutionized Minnesota's craft beer industry, Bandy said, to the point that breweries that don't sell them are at a competitive disadvantage.

"If a leadership team is not thinking about it seriously, I would say it's at least irresponsible," Bandy said. "It's worth thinking a lot about."

Since the state allowed liquor stores to sell THC starting last year, it's been a windfall for those retailers and breweries, said Tony Chesak, executive director of the Minnesota Licensed Beverage Association.

"Whether or not it sustains, we're kind of in wait-and-see mode," Chesak said.

THC beverages have become as much a part of the alcohol industry as the cannabis market, since they're widely available in breweries and liquor stores throughout Minnesota and often distributed by liquor wholesalers.

"I've spoken to some of the largest alcohol conglomerates in the world about getting into the hemp-derived space," Vicente said. "The level of interest is extremely high."

That doesn't mean there won't be room in the market for smaller THC seltzer makers. Already, many Minnesota-based THC brands are expanding to other states — a necessary move to keep growing as the state has only so many potential cannabis users.

"I think alcohol showed us that there's space for your local brew pub, and there's also folks that want to drink Budweiser," Vicente said. "I think that will probably be the way it plays out in cannabis, too."

The overlap

By the time state-licensed dispensaries open, many Minnesotans will have had a chance to dabble with small doses of THC, providing a bridge to the recreational market like no state has had before.

At the Sweetleaves cannabis retailer in North Loop, customers often come in pairs, one an experienced user and the other a friend who doesn't partake and is a bit skittish. Co-founder Adam Hoffman wants to make sure they both come back.

"One of our main missions is educating customers and never overdosing someone," he said. "I'd say a majority probably dose up eventually but our whole thing is under-dose first."

Dillon, at Mary & Jane, said low-dose brands and retailers should be educating consumers and making cannabis "approachable" for those who do cross over into the stronger stuff.

"Maybe you want to get a little more high," she said, "and eventually maybe our customer does go to a dispensary because she feels more comfortable and knowledgeable about THC."