Regulatory insecurities and crashing wholesale prices are driving new money to the holy grail of true customer satisfaction.
Now that the industry has hit a sort of phase two in development - with more states about to legalize recreational and medical in the offing, an entire new country with legal cannabis, and the chance that legalization/scheduling issues will soon be addressed in Congress through new legislation like the STATES Act - cannabis investors and owners are beginning to focus on two essential and basic business development issues of any new cash crop going forward: building brands and enhancing the retail store experience.
In other words: Customer satisfaction and retention.
Building brands is about timing, according to Micah Tapman, director of BDS Analytics and managing director of Canopy Ventures.
“It is really challenging to build a brand,” he says. “When I look at brands that are doing well, they are grass roots-built brands where those who developed them have put in a lot of elbow grease. But you can’t easily deploy $20 million to build a brand now. You can’t do television advertising or Instagram or Facebook promotions (because of federal prohibition). I see brands as a huge opportunity but it’s a matter of timing to me.”
He says CBD brands in the wellness category are “probably the fastest moving category in cannabis.”
Smoke Wallin, the president of Vertical, a vertically-integrated medical cannabis company with operations in Arizona, California and Kentucky, and with a solid background in liquor and beverage brand building, believes that it’s the micro-dosing brands that will dominate the market because people want to know exactly how much cannabis they are consuming, and can manage the cannabis effect in a social situation.
“Micro-dosing is a billion-dollar idea - executing it and getting it out on the market,” Wallin says. “There are so many basic building blocks that have to happen. But those brands, if you can execute, will be giant brands.”
Brand development is catching the interest of the investor community now.
Speaking in New York at the Institutional Capital and Cannabis Conference on October 23, 2018, Scott Greiper, president and founding partner of Viridian Capital Advisors, says that he is seeing capital investment coming into the brand space.
“We didn’t see that a year ago,” he says. “As wholesale pricing declines, the sustainability of pricing is in the brand, and the sustainability of customer acquisition is in the brand.”
The opportunity as an investor on the East Coast is that you are going to get a huge competitive advantage because legalized states there are in a capped license environment, according to Abner Kurtin, founder of Boston-based Ascend Group Partners. “In Massachusetts, we are in a protected market and hopefully that will give me two to three years to build a brand.”
He says that everyone is focused on brand.
“Who is going to be the next Coke and who is going to be the next Apple? Some companies have a really good shot at it. But let’s be honest - 95 percent of these brands fail because in our industry, brands are really hard to do.”
Adrian Sedlin, CEO of Canndescent in Santa Barbara, makers of premium brand cannabis products, says the branding issue actually involves a pretty simple formula. “In this industry, the long term formula is brand times execution,” he says.
“But it’s that execution piece that most people don’t understand. A company needs to build and execute their brands from day one – injecting it into finance, marketing, human resources – where everything about their business reflects the brand and the problems they are trying to solve. That is the kind of execution that will build lasting value in the marketplace.”
Sedlin says that he has yet to see a world class retail experience. “I have yet to see someone who really solves the retail sales model for cannabis, where it’s easy to buy and it’s a wonderful experience and customers want to come back to that store. I have yet to see someone crack the code of retail of ‘this is cannabis and this is how do you sell it’.”
Challenges of building a successful retail brand
It’s because this industry is still growing, and still segmented, facing a wild patchwork of various state regulations basically as a result of the limits of federal law, that having a successful retail operation gets more difficult as the industry grows.
“Big U.S. product companies have multi-million dollar sales analytics teams and marketing strategies about how they acquire shelf space at Safeway vs. Walmart because the data analytics speak to results,” Martin Kaufman, a long-time cannabis investor and the developer of Blum dispensaries and Grasshopper Kiosks in California and Nevada, says.
“We say ‘I think my pot is cooler than your pot’ and think the world will just magically agree. But we in effect have to wing it because the market is still so segmented.”
One shot at finding that right retail sales experience that gets the customer into the store, and returning to that same store for additional purchases, is being attempted in Las Vegas.
Robert Groesbeck, co-CEO of Planet 13 Holdings, operating the Medizin dispensary in Las Vegas, says that his company is focused on the retail experience going forward.
“We are getting ready to open the largest dispensary on planet Earth in Las Vegas (on November 1),” he says. “What we are trying to do is tie-in an experiential component to the retail experience, and what better place to do that in the entertainment capital of the world - Las Vegas.”
He says that Medizin serves about 850 customers a day inside the 2,300-square-foot dispensary. Their new facility will be 40,000 square feet, with 16,200 square feet of that space dedicated to retail sales.
“What we are trying to do is to look to other jurisdictions to replicate this model,” he says, adding that they are hoping to add a social use area to their new facility if and when regulators allow it.
But once again, it’s the limits of the regulatory structure of various states that hampers industry growth.
Legislative miscues are hurting business growth
Kaufman says that, even if you get multiple locations in any one state, there are complications. For example, in California, the legislative body that governs what a cannabis store owner has to do varies form one city to the next, and sometimes from year to year.
“In the city of Oakland for example, we would be opening up another location in another jurisdiction that would have another set of rules,” Kauffman says. “Their testing parameters at a local level were different, their reporting requirements might be different. The state of California might change their rules from one year to the next. You literally might be juggling rules from two to nine different bodies of law that apply to what is, effectively, as far as you are concerned, the same business.”
The bottom line is that this industry needs to get the federal government out of the way and let the states’ rights “laboratory of democracy” do their work. What is happening now as the industry evolves – the changing state and local regulations, the heavy tax scheme, the real estate restrictions on where to locate, to name a few – is hampering the growth of consumer-focused retail stores and brands, and causing focused entrepreneurs to bail out and find other ways to support their families.
“If you truly speak with the operators like we do across the country, there are many folks that are doing $10 million or $20 million or $30 million in revenue but may have zero or, really, nominal amount of profitability,” Michael Gruber, managing partner of Salveo Capital says.
“It’s because of all of this regulatory issue stuff, based on license fees and excise taxes and income taxes, where, because of 280E, you are not able to deduct your standard operating expenses,” he says. “What that means is that you need to have now enough capital as a company to be able to shoulder that difficulty in these ensuing years until you get to big enough in terms of scale or until the repeal of 280E.”
Award-Winning Journalist David Hodes is the Washington Correspondent of The American Cannabis Report. Keep an eye on this news source for breaking news from our nation's capital as it wrestles with ending Prohibition.