House Party

CANNABIS BRANDS HAVE an opportunity to capture the hearts and wallets of consumers in one of the fastest growing consumer product categories ever. All the while major global consumer packaged goods (CPG) companies are sidelined by federal prohibition. In any other US$26-billion, plant-based CPG category, Walmart, Procter & Gamble and Cargill would already be in the process of consolidation.

Instead, a growing host of 3,000-plus cannabis brands is building brand-equity in advance of CPG giants coming into the industry. Every year federal prohibition lasts makes it more likely that CPG companies will have to buy their way into cannabis by acquiring one of the increasingly well-established existing players. Some cannabis market leaders may themselves become economy-spanning giants by expanding from their cannabis-industry base.

To get there, cannabis brands are adopting, and sometimes inventing, approaches quite different from standard brand-building strategies.

“While mainstream CPG brands can follow traditional marketing strategies with long track records of success, the cannabis industry requires out-of-the-box thinking as well as the ability to pivot quickly,” said Kate Lynch, EVP of Marketing at New York, NY-based Curaleaf, citing the need to find “creative ways to navigate the roadblocks imposed by state-by-state regulations.”

That need for creative approaches stretches across all departments: from product and business development to marketing and sales.

In product development, creativity has run wild since the early 2010s as the legacy market’s simple “bag of weed” gave way to a cornucopia of inhalables, ingestibles and topicals largely developed by innovative start-up brands.

On the business development front, federal prohibition has forced cannabis brands to expand one state at a time rather than in coordinated national rollouts.

In marketing their products, prohibition has forced brands to stay off the airwaves and instead do much of their communicating with consumers in stores and on phones.

Turning to sales, some of the western-state pioneers go it alone in new states and some are distributed by what in any other industry would be their competitors. Some eastern multi-state operators (MSOs) are focused on wholesaling to other retailers, some on maximizing sales in their own stores.

As Kiva Confections co-founder Kristi Palmer noted in this month’s Global Cannabis Times Interview (See “Kiva Diva,” p38), “it’s too soon to tell” which of these strategies will become the standard operating procedures of the future. But it’s a good bet that the creativity that is forced on cannabis companies will yield innovations that become the business-school case studies of the future.

Product Development

RIDING A WAVE
OF INNOVATION

Branded products now represent more than 80% of sales in some states, and the growth of the market share that brands command is inversely correlated to the decline in market share of flower, the industry’s core product. Flower’s share fell in a few quick years, from the 70%-range to less than 40% in older adult-use states, largely the result of price erosion.

Flower has proven tougher for companies to brand than manufactured product, where branding has had its typical positive impact on getting consumers to pay a premium for recognized favorites. The resulting better margins attracted many companies to specialize in vapes, edibles or pre-rolls (See Table 1).

Four private, pureplay (CPG manufacturing and distribution only) or hybrid (some self-operated retail) cannabis companies earned spots on BDSA’s 2022 Top 10 Brand Houses ranking. This is thanks largely to their success in California, at $5.2 billion in ’22 cannabis revenue the country’s largest market by more than 2X.

The biggest gain in category-share in the last three years in California (4 share points, according to BDSA) has been in pre-rolls. That has partly been driven by the success of DreamFields’ Jeeter brand, which has had some Kleenex-style success in becoming synonymous with its product category.

But Palm Springs, CA-based DreamFields didn’t start out in pursuit of the pre-roll business, which was just a sliver of the pre-2018 medical-only market. Like a lot of cannabis startups “we believed we needed to build out our own cultivation and extraction,” said Jeeter co-founder Sebastian Solano. “But we soon realized the main thing is a successful brand, and then the infrastructure can come later at lower risk.”

Jeeter’s switch to focus on pre-rolls arose from personal taste. “We’re big pre-roll smokers and there was nothing available we felt proud to buy and smoke,” said co-founder Lukacz Tracz.

Similarly, as concentrates grew to more than 30% of the California market per BDSA, Shryne Group focused on the vapes sub-category with its STIIIZY-branded pen and cartridges. Dominance in California, a growing portfolio of product types and expansion to Washington, Nevada, Arizona and Michigan landed the LA-based company in the No. 2 slot in BDSA’s Top 10 Brand House ranking for 2022. Shryne Group also operates or licenses the STIIIZY name to more than two dozen retail stores in California and Michigan.

The market share of edibles in California has held steady in the mid-teens since 2019, per BDSA. That’s created a solid base for two of the leaders in the state’s edibles market to expand: Clackamas, OR-based Wyld is now in 10 states and ranks 6th in the BDSA universe, while Alameda, CA-based Kiva is in 11 states and ranks 8th.

Business Development

TARGETING GROWTH,
ONE STATE AT A TIME

While those four western-state pioneers stayed private, six of the 10 largest brand houses—all publicly traded MSOs—seized on the sudden availability of public equity money in 2018 to build vertically integrated operations in many states in a hurry, performing functions like cultivating and retailing that most CPG outfits wouldn’t touch.

Like mainstream CPG companies, all the U.S. cannabis brands have several fundamental drivers of revenue growth. They all benefit greatly from growth in U.S. consumer spending. BDSA estimates their total addressable market (TAM) went from $2.4 billion in 2013 to $26.4 billion in 2022, a remarkable 30% compound annual growth rate (CAGR) over a decade.

But federal prohibition has each house of brands inhabiting a somewhat smaller universe than that—their geographically defined serviceable addressable market (SAM), defined as the total consumer spending in the markets in which they operate. The Top 10 Brand Houses’ SAMs in 2022 ranged from NYC-based Ascend’s $8.1 billion in six markets to Curaleaf’s $22.3 billion in 20 states (See Table 2).

Their SAMs can expand when states they’ve already entered grow consumer spending or when they enter new geographic areas. But expanding their geographic reach is very different for cannabis companies than for other CPG companies since they are disqualified from tapping into the well-developed U.S. interstate commerce system by federal prohibition. Instead, they must either launch their own state-licensed operations in each new state they go into, or create partnerships with already-licensed operators in expansion states. Picking the right new markets to enter has proven a dicey proposition. Regulatory strictures and the gray market have played havoc with the traditional targeting metric of simply going where the consumers are.

Take California. It had by far the most cannabis consumers (3 million) and total spending ($11 billion) on the product—legal and gray market—when adult-use arrived in 2018. But BDSA forecasts that California’s legal revenues will contract another 9% to $4.8 billion in 2023. That makes California the main variable in Global Go Analytics’ analysis of each of the Top 10 Brand Houses’ SAMs, based on BDSA forecasts for 2023 (updated in July). A company’s change in SAM between ’22 and ’23 provides a good starting point in forecasting revenue growth for these companies.

Of course, neither a huge SAM nor even solid revenue growth in that SAM necessarily yield profitability. Hence, after years of a “land-grab” approach by companies that feared missing out on any opportunity, some major brand builders are pulling back from some major markets to focus on those with better growth prospects, or in which they are more strongly positioned.

Curaleaf had the largest SAM of any cannabis company in 2022—$22.3 billion versus second-place Cresco Labs with $17 billion. But Curaleaf began the shuttering of its production and cultivation facilities in California, Colorado and Oregon in March.

Ayr Wellness, headquartered in Miami, FL, completed its exit from Arizona in March. Another major brand player, Tallahasse, FL-based Trulieve, began closing down all of its Massachussets operations in June. These companies are deliberately shrinking their addressable markets for good reason: to focus on fewer states with better growth prospects.

Others continue the land grab that has been the hallmark of the business. The largest brand house in BDSA’s tracking by sales is Chicago, IL-based Cresco Labs, whose 10 states had a SAM of $17 billion in ’22. Cresco’s SAM is slated to grow by 7% to $18.3 billion in ’23. But if it can close its long-pending Columbia Care acquisition, it would add a whopping $2.9 billion to its ’23 SAM (Colorado and New Jersey would be the big additions), supplanting Curaleaf as the company with the biggest footprint in the country at $21.2 billion, up 24%.

For now, Shryne Group is looking at the biggest percentage gain in its target market. Its May announcement of a move into Illinois will push its ’23 SAM to $13 billion, up 18%. Kiva Confections, among the first brands to expand out of its home state of California, is expanding again on the east coast, adding New Jersey to increase its SAM by 15% to $18 billion.

Marketing

RISING TO
THE CHALLENGE

Cannabis brand houses face traditional marketing issues such as how to position their products: by category (with a different brand name for each product category, e.g., flower, pre-rolls, gummies, chocolate) or by brand (with the same brand name on a variety of product types). The approaches taken by cannabis companies have been creative, to put it mildly.

But federal prohibition may be the factor that’s forced cannabis companies to do their most innovative work, and they may end up teaching brand marketers in the broader economy a thing or two.

For starters, they are legally barred from federally licensed airwaves and stigmatized out of many of the other media outlets that CPG brands have traditionally relied on.

“It’s very different from Molson Coors where you have millions in budget and you are just deciding on a channel mix and looking at econometric models to make each incremental dollar deliver incremental returns,” said Nate Reid, SVP of commercial strategy at Cresco Labs. Reid, who previously worked at Molson Coors, added: “There’s a lot of brand proliferation and you have to market along the value chain to the buying accounts.”

The upside of the market’s fragmentation is that it creates dozens of autonomous marketing laboratories, allowing companies to try new methods at lower cost, and learn from mistakes with limited downside if they fail. Brands big and small are busy finding unique ways to leverage the broadest of media—the Internet—and the most local of promotional events, such as an in-store “patient appreciation day” (PAD).

Two private brands are emblematic of the marketing creativity in cannabis. DreamFields has parlayed its co-founders’ event-production experience into a regular series of “Jeeter Activations” that started by creating a replica Blockbuster Video store at a Leaflink conference.

“We built shelving and signage and put joints on the covers of DVD cases, trying to evoke the ’90s nostalgia of our target consumers,” Tracz explained. “We immediately had stores asking us to do it at their locations and we ended up touring 40-50 dispensaries with it.” New product releases now always come with “Jeeter Day” drops.

“Stores are loving it. It’s not just a normal PAD, just a table in a dispensary. It brings new traffic into stores,” Tracz said.

Miss Grass CEO Kate Miller comes from media background, which may explain her approach to launching a brand targeting women. Miller and her co-founder Anna Duckworth didn’t set out to build a CPG company but market research convinced them to give it a go.

“For us, the product didn’t come until year three of the business. We initially launched as an online magazine and community platform. We got a two-way conversation going, allowing us to gather data on what people are consuming, what they care about,” she said.

MSOs have an additional marketing tool—their own stores.

“What is this business?” asked Ayr Wellness’s David Goubert when he came aboard last October as president and now CEO. “There’s the network of stores, and there’s growing and processing and selling to other stores. There’s benefit in having them together, but the focus of the stores needs to be on building a loyal customer base for products that someday will be available everywhere.”

To that end, Ayr will be undertaking a rationalization of its brand portfolio down to four. Keeping the Levia beverage brand as a stand-alone, all other categories will be subsumed into a traditional good-better-best structure, with today’s lead brand “Kynd” as the flagship in the “better” slot.

“Consumers use all the form factors at different moments. Plus, it’s such a fragmented business, if you’ve got 5-6% share in a given market and you’re splitting that between 12 brands, it’s hard to build awareness and create brand equity,” Goubert said.

Sales

TO RETAIL,
OR NOT TO RETAIL?

Having their own stores, MSOs also have an advantage where the rubber meets the road: sales to the end consumer. “At the end of the day, the foremost marketing asset we have is distribution. If you can be seen you can be bought,” said Cresco’s Reid.

“Despite the long-term economics of retail being a little less favored, we’ve done everything in our power to invest in retail where it makes sense given our production ability and ability to learn more about consumers in that network,” he said.

Cresco of all the MSOs puts the most emphasis on its wholesale business of selling products to other retailers. “Our retail/wholesale split is close to 50/50, while a lot of MSOs are 70-80% retail. Right now, there’s a lot more emphasis by the MSOs to go increasingly vertical to support their profit margins,” he said.

“I think at the end of the day that’s a viable strategy until door counts accelerate to the point they deteriorate margins on the retail side. Today you might be 10 of 100 accounts in Illinois, but eventually 10 of 1,000. Retail may be the only way to get ahead in the current environment, but you need to be building assets on the wholesale side.”

Some independent brands without retail assets are doing just that. Wyld co-founder and chief marketing officer Chris Joseph noted that his company has built its own distribution network in each new state it has entered.

“We were forced to create our own infrastructure,” he said. “Distributors wanted 20-30% of revenue, so we bought our own vans.”

The Future

THE MODERN
MAINSTREAM

The COVID pandemic changed many things in the CPG business and many of those changes appear to have staying power, according to Reid. “A lot of the cannabis growth that’s happened in the past three years has been facilitated by ecommerce, first with COVID and then by familiarity with that system,” he said.

Cannabis has its own form of ecommerce, again thanks to federal prohibition. It’s built around the two-step process of online ordering and in-store (or curbside) pick-up, and on fleets of retailer-owned delivery vehicles rather than the FedEx/UPS/USPS-enabled system other industries use.

But it’s got the same imperatives in many ways as any ecommerce approach: “How do we show up on that menu? How do we branch out, does the packaging look appealing, what are the clear values that we’re conveying?” Reid said. That’s a lot of marketing impact that increasingly has to be crammed into a tiny phone screen.

The wireless approach is crucial in all product categories. It is paramount in a legal industry that didn’t even exist until seven years after the iPhone’s introduction and shares with it a young, tech-savvy demographic target. Beyond the benefit of a digital approach to reaching consumers, Miller of Miss Grass is also seeing strategic payoffs.

“It has really supported our ability to develop these relationships and structure these partnerships as we expand state-by-state, because when we go into a state like New Jersey and look for the right supply chain partner to hold hands with, we go to them and say, ‘Look, here’s what our NJ community looks like, here’s the size, here’s the email addresses, social following, and here’s exactly what they’re consuming.’”

Online marketing, sales and community-building on a national (and eventually worldwide stage) are here to stay—even when federal legalization obviates the need for a lot of the workarounds cannabis brands are forced into these days.

Meanwhile, brand executives clearly relish the unique challenges of today’s legal cannabis business (and you can’t beat the way the frequent-flyer miles add up). But the simpler days on the other side of federal legalization have some appeal.

“Vertical integration never made sense for us, so that won’t change,” Wyld’s Joseph said. “But we’ll always want to control production of our products, so when we’re allowed to ship interstate, we’ll just convert our local kitchens into distribution warehouses.”

That would indeed be a happy ending for a brand that was launched in a farmhouse kitchen in Oregon.

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