The blunt truth: Cannabis retail is here
It's a growth industry where the potential is high, but retailers and consumers are both on a steep learning curve.
Just a year after legalizing recreational marijuana, Colorado's licensed retailers in 2016 notched nearly a billion dollars in sales, surprising many observers who didn't reckon the higher priced goods could compete with the black market.
Just two years on, Cowen & Co. analysts, noting how swiftly more states are moving to bless adult use, boosted their U.S. cannabis market target by $25 billion, saying in a report released in April that they anticipate the industry "to generate $75 [billion] in sales by 2030."
That's cultivating some luxe operations. "I grew up in Texas when even having a roach in your car ashtray was a felony offense," Scott Campbell, co-founder of Beboe, an upscale California cannabis brand that worked with Barneys New York to establish the department store's new The High End concept, told Retail Dive in an interview. "We're taking that same substance and literally putting it on a marble pedestal."
And a lawful one. The global cannabis market, both licit and illicit, has reached $150 billion, but by 2025 legal cannabis will encompass 77% of the market, or $166 billion, according to Euromonitor International. "Within 10 years, cannabis will be a regular part of daily routines," Zora Milenkovic, Euromonitor head of drinks and tobacco, said in a statement. "From a functional ingredient to an intoxicating buzz, cannabis will reshape fast-moving consumer goods, with food, beverages, beauty, health and tobacco having the most potential for disruption."
The two markets — high and dry
Jefferies analyst Owen Bennett is more conservative, pinning the global market (led by the U.S.) at $30 billion by 2022 and $50 billion by 2029, according to a February report cited by Barron's. That's just the segment of the market that includes tetrahydrocannabinol (THC), the psychoactive ingredient that until recently rendered the plant contraband in all of North America. Weed is now legal and regulated in Canada and to some degree in 33 U.S. states (with 10 of those allowing adult recreational use in addition to medical use), and Mexico's Supreme Court last year declared its recreational marijuana interdiction unconstitutional.
As the Cowen analysts note, that's poised to challenge the alcohol, spirits and restaurant markets and could be increasingly used in medicine in place of highly addictive opioids as well. While some THC dispensaries and stores position themselves as recreational, like Amsterdam-style coffee shops, taverns or bars, others take a wellness approach, more like a spa, drugstore or doctor's office. The first may be inclined to celebrate legalization with nicknames that hark back to street sales, but many cannabis business people, including Patricia Rosi, who runs Wellness Connection of Maine, prefer a lexicon that reflects a well-run retail business and customer care.
"We cater to people who value quality control, we're involved with the community, we offer education. Here they feel more safe."
CEO of Wellness Connection of Maine
"I mean 'green crack,' really?" she told Retail Dive in an interview. "Eventually, people are going to say, 'I'm not going to drink moonshine anymore.' We cater to people who value quality control, we're involved with the community, we offer education. Here they feel more safe."
But weed is also growing beyond either approach, thanks to the non-psychoactive CBD (cannabidiol) that can be derived from it and American consumers' willingness to embrace unproven wellness claims.
It may be CBD's turn, judging by the plethora of brands embracing it as an ingredient, which has only accelerated since the U.S. farm bill signed into law last year removed the cannabis plant hemp's designation as a Schedule I substance under the Controlled Substances Act, effectively decriminalizing CBD (or at least, that's how the change is being interpreted). While outright federal legalization in the U.S. doesn't seem imminent, the government is weighing in on some aspects. After the agriculture rule change, for example, the Food and Drug Administration clarified that ingestible or topical substances containing THC or CBD can't be carried across state lines, warned against making unverified health claims about either and said that neither can be added to food.
That isn't holding CBD back. Among the many retailers and brands that have struck up deals with purveyors of CBD or other cannabis-derivative products, which claim wellness attributes like anti-acne, anti-aging and anti-inflammatory properties, are Authentic Brands Group, Free People, Neiman Marcus, Barneys, DSW and Sephora.
But Green Growth Brands, a year-old publicly traded Canadian cannabis goods maker and retailer of both THC and CBD goods that recently inked deals with several American malls to establish its Seventh Sense CBD Shops nationwide, is stoked about CBD, despite the legal limits. "We are not making any claims regarding the benefits of CBD, again, a no-no per the FDA," a GGB spokesperson told Retail Dive in an email. "We also want to be clear that our CBD products are not psycho-active and will not create a high. We will say that these are fantastic products that standalone tremendously as personal care products and have the added element of CBD."
However it's marketed, CBD represents a lot of green. The Cowen team recently estimated that the CBD market alone could reach $16 billion in sales by 2025, according to their report cited by Forbes. And according to an email to Retail Dive from Nielsen, which recently partnered with cannabis analytics firm Headset in tracking the market, "the size of the cannabis opportunity (or threat) to CPG companies currently stands at $4.3 billion."
The sober realities
The THC and CBD markets are both complicated by a host of factors, however. These are emerging industries, with patchwork regulations as legalization occurs state by state and with agricultural, scientific, quality control, marketing, manufacturing and packaging implications. State governments continue to refine their laws, which sometimes come down from the courts. In many ways things are getting easier — while a few years ago legalization meant running a strictly cash business, for example, state banks and credit unions have begun to work with cannabis companies in providing credit and accounts — but it's hard to run a business with constantly changing rules.
"There's a lot of confusion in the industry — a lot of opinions and perspectives," Naomi Granger, founder and COO of cannabis consultancy Dope CFO, which provides business services and trains accountants to handle the specialized needs of cannabis companies, said in an interview with Retail Dive. "You don't have to hire us particularly, but you do have to hire a 'dope accountant,' someone who understands the lay of the land in your state. You need investors because you need to be very well capitalized — right now there's a high cost for everything, and high taxes. You need a team in place to make sure you're catching everything. As the business owner you need to be getting involved in your local politics and federal politics. You need to stay informed — there are so many court cases out there and they're coming quicker and that's what's shaping our laws — and the regulators are looking deeper into these businesses."
"[A] lot of people don't know what they want because they've never used it before. It's a huge learning curve for everybody, and it's a merchandising conundrum."
Founder of Substance
As Granger demonstrates, other business ventures are also sprouting up to meet the needs of cannabis sellers. Jacques Santucci, who runs business management firm Opus Consulting Group, established Nucleus One, a cannabis consulting niche practice, and developed Strimo, a secure cloud-based solution that combines cultivation, manufacturing, accounting and dispensary management on one business platform. "There is a need for better standards in the industry as well as data analytics," he told Retail Dive in an email. "Through the software, our goal is to be able to assist operators with it, covering the entire business operation, from manufacturing to sales to accounting. Strimo ... enables operators to scale growth, mitigate risk, manage compliance and optimize results."
Many cannabis businesses are also getting up to speed when it comes to the fundamentals of retail. Jeremy Kwit, owner of Substance, a five-store cannabis chain in Bend, Oregon, that includes a coffee house, says that merchandising is still evolving.
"The consumer, our guests, are so heterogeneous in their knowledge and familiarity with cannabis, and there's also been an explosion of different cannabis variations, so the formulations are vast," he told Retail Dive in an interview. "Then, we've moved from prohibition — purchasing from either moonshiners or bootleggers — then to medical, where you essentially used a special knock, with products under glass and at knee level. To now, where a lot of people don't know what they want because they've never used it before. It's a huge learning curve for everybody, and it's a merchandising conundrum."
Traditional retail provides some answers. There may be no clearer indication that cannabis retail is swiftly becoming mainstream than the fact that GGB CEO Peter Horvath has done executive stints at L Brands and other retail companies. On a recent conference call, the company's first after going public, he compared Seventh Sense's marketing potential to L Brands' Bath & Body Works.
"Even three years ago the landscape of products was 'How high can I get for 20 bucks?' whereas now that's not the biggest factor."
Co-founder of Beboe
"At GGB, we are applying our expertise in retail to our cannabis dispensaries," the company spokesperson told Retail Dive. "Every aspect of a store experience is interwoven: the assortment architecture informs the store design, planning and allocation of product inventory, product packaging, store training, and so on. From a consumer packaged goods perspective, we are applying decades of experience creating high-quality personal care products for global organizations to CBD-infused personal care and beauty products."
Like Rosi and Kwit, Beboe's Campbell believes the cannabis retail era is centered above all on a highly personalized customer experience. "A big part of our energy goes into education," he said. "Even three years ago the landscape of products was 'How high can I get for 20 bucks?' whereas now that's not the biggest factor. I'm a very aesthetic person and a lot of attention has gone into the aesthetic of our brand. Our products are made for people like me — who maybe have time to indulge once or twice a week. I'm careful about what I put into my body. It's like the wine industry — people make their decisions based on their level of education. Some just know 'red and white,' others want to be more discerning."
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