Santa Monica, CA:
The cannabis industry is complex to navigate, even if the plant is often viewed as a gateway to a simpler state of mind. To help food and drink entrepreneurs grow within it, experts presented data and insights last month at BevNET’s third Cannabis Forum, held December 6 at the Loews Santa Monica Beach Hotel.
Ricardo Baca, founder and CEO of regulation-focused communications agency Grasslands, kicked off the event by reviewing the current state of the industry. He noted that cannabis contains 120 different kinds of terpenes, which provide scent and flavor and enhance medical efficacy — especially when combined with cannabinoids to achieve the “entourage effect.” And although the market is dominated by just two cannabis strains, indica (physically sedating) and sativa (uplifting), along with hybrids, there are hundreds more to explore.
However, growth depends on policy. Currently, there are three types of cannabis licenses: cultivation, manufacturing and retail. Adult-use (ages 21+) marijuana is legal in 11 states, while 33 states have approved for medical use, with Michigan and Illinois coming online in 2019. Initiatives to legalize marijuana will also be on the ballots in Florida and Arizona this year.
“You can’t put the toothpaste back in the tube,” Baca said. “[Marijuana is] only going to become increasingly more legal here and abroad over the next few decades.”
Approving legislation that protects banks working with cannabis businesses, like the Secure And Fair Enforcement (SAFE) Banking Act, which recently passed through the House of Representatives, is also critical, according to Baca.
“The fact that those votes happened on cannabis-specific bills alone is historic and monumental,” he said. “It shows there is movement.”
But even though 67% of Americans support legalization, less than 20% are regular cannabis consumers, providing an opportunity for entrepreneurs to reach canna-curious consumers. But broader challenges still exist, and cannabis beverages remain a “very complex market.”
Chris Cuvelier, head of beverage at cannabis cultivator and manufacturer Caliva, is determined to take on those challenges. In May 2019, Caliva acquired Zola, the açai juice and coconut water brand of which Cuvelier is the former CEO, to use the company as a platform to develop cannabis drinks, including both THC and CBD-infused beverages. Caliva currently operates 250 of the top 600 licensed California dispensaries, having opened its own beverage facility to maintain quality control for its beverages and allow for future co-packing opportunities. For now, the focus is capturing consumers through education.
Cy Scott, CEO of cannabis intelligence firm Headset, further examined the evolution of the modern cannabis consumer. He noted that Gen Z will likely comprise about 6% of cannabis market sales, as they’ve seen usage “relatively normalized in a regular market.” Scott added that edibles comprised 11% of the market last year, while cannabis beverages have maintained market share in the last two years, but had higher sales in Washington and Colorado than in California. Products’ effects also vary: although some are marketed for a calming or relieving mood, others, like low-dose cannabis tonic brand CANN, focus on taste and positioning as an uplifting social stimulant. In a market that’s getting noisier, cott encouraged entrepreneurs to find white space.
Luckily, once a brand has been established and gained consumer trust, those customers tend to remain loyal, said Dr. John Oram, CEO and founder of cannabis brand NUG. The company — which produces oils, flower and packaged food products — opened two California-based retail outposts to extend the brand’s identity and engage with consumers. About 60% of NUG “enthusiasts” are males who purchase flowers and pre-rolls, Oram said, noting that the “curious and discerning” cannabis consumer needs streamlined products, experiences and systems.
“They want a normalized experience,” Oram said.
As such, entrepreneurs and brands should prioritize safety, said Jill Ellsworth, founder and CEO of Willow Industries, Inc. According to Ellsworth, industry safety standards are too siloed by state, and murky guidelines have led to mislabeled CBD products and contaminated hemp plants.
“Moving toward the adoption of safe standards is where we need a lot of help,” Ellsworth said. “The adoption is coming; change is happening. We move slow.”
Indeed, as the industry grows, brands will guide consumers with legal, high-quality products, said Michael Blue, managing partner at Privateer Holdings, the world’s largest private equity (PE) firm in the cannabis industry. When the venture capital firm launched in 2010, there was little competition, but the climate has changed markedly.
“Raising money today is certainly not as difficult as it was 10 years ago,” he said. “Investors are being incredibly diligent about digging into the numbers, values and models.”
Privateer has plans to grow its cannabis portfolio, which includes companies like Tilray and Docklight Brands. Christian Groh, a partner at Privateer Holdings, emphasized the opportunity for CBD products to expand across drug, grocery, and convenience channels, where there has been little penetration so far.
However, Allison Margolin, partner at firm Margolin & Lawrence, cautioned those new to the space about other “sticky issues,” including foreign investors potentially being flagged by immigration authorities. Entrepreneurs need to check investors’ backgrounds thoroughly and avoid illegal activity themselves, she advised.
“Federal legalization is the only way to resolve tension,” Margolin said. “Customs has its own philosophy, and it’s gotten even worse.”
As U.S.-based companies navigate regulatory gray areas, they’re staying private longer, said Hershel Gerson, managing director at ELLO Capital. But consumers are fueled by a healthy labor market — and thirsty for better-for-you beverages, he added: the CBD beverage market, currently valued at $227 million, is expected to have a compound annual growth rate (CAGR) of nearly 75% by 2023. Additionally, Jacqueline Bennett, director at Sands Lane Capital, listed “fresh,” “natural,” “value” and “convenience” as four key attributes consumers are seeking in cannabis products.
For more information about this post, contact Margolin & Lawrence.