By Olivia L. Dubreuil, Esq., Brett Giddings No Comments
Most readers ought to be well aware that the cannabis industry is rapidly growing. The Arcview Group, an Oakland-based investor network, estimates the retail and wholesale cannabis market will reach $22.8 billion by 2020. That number represents a lot of people consuming cannabis in many different ways.
The average cannabis consumer is changing. A new range of social groups is consuming cannabis-based products. From yoga diehards, to middle-aged men and women, veterans that have ‘tried everything else’ and young professionals looking for a different way to relax, the market is broadening.
This new segment of cannabis consumers are often not looking to get high- they are looking for anti-inflammatories, relaxants and ways of dealing with chronic pains and stress. For these health and wellness seekers, the last thing they want is a product dosed with pesticides, insecticides or butane residues. We can expect to see these consumers to follow broader consumption trends- specifically when it comes to a product like cannabis that people are inevitably placing in or on their bodies.
These consumers come with new sets of expectations, similar to those when they buy fruit, vegetables, coffee or chocolate. They are increasingly curious about the contents of the products they purchase- they are a large part of the reason that the sales of organic produce has ‘ballooned’. They are asking questions like: Does the product contain pesticides? Has the product been cultivated in a way that minimizes negative environmental impacts? How do we know that the supply chain quality controls are rigorous enough to ensure no one has tampered with the product? Who is growing and picking this product and how are those people being treated?
When a curious consumer enters a modern American supermarket, they are guided by a range of messages relating to the contents and supply chain that was part of making each product. Organic, non-GMO, pesticide-free, fair trade, free-range and locally produced are some of the common criteria. The more credible labels are supported by codes and procedures in which the whole supply chain is audited, monitored and approved by the certifying body according to certain standards- for example the USDA certifies organic foods.
Being a Schedule I controlled substance under federal law, cannabis is probably not going to receive USDA organic certification any time soon. However there are organizations out there that are committed to increasing the availability of cannabis grown with organic practices. Certifying bodies like Certified Kind and the Organic Cannabis Growers Society are gaining popularity among growers who see the market evolving in that direction. At the same time, businesses such as Delicious Fog (an ‘organic-focussed’ delivery service in Santa Clara County) and Harvest (an ‘organic’ dispensary in San Francisco)- are specializing in the sale of these ‘organic’ cannabis products.
Just like any sustainability issue- ensuring your cannabis product comes from a well-managed supply chain cannot be a last minute add-on. Whether a business is small, large, mature or emerging, developing a strategic approach to the diverse spread of sustainability challenges is critical.
As a cannabis business what can you do to appeal to the new cannabis consumer?
With 2015 coming to a close, to understand and start strategizing for the next year, we must look back on the year and gauge the industry’s progress. A lot has happened this year and there is a lot to look forward to in 2016.
Nic Easley, founder and CEO of Comprehensive Cannabis Consulting (3C), gave a presentation at the High Times Business Summit last week, reviewing the cannabis industry’s progress in 2015, and providing some insights on what to look for in 2016. 3C is a national cannabis and hemp consulting firm dedicated to ensuring the highest standards in large-scale, sustainable organic production and product manufacturing. Over the past eight years in Colorado and nationwide, Easley has helped more than 60 clients design, build, start up, and optimize their operations. Easley is an active participant on multiple committees in various industries, non-profit groups, and rule making organizations that are setting the standards and regulations guiding this industry. Through his involvement he is able to promote sustainable, sensible practices and policies that drive cannabis cultivation and industry best practices into new realms of productivity, profitability, and professionalism.
We were able to sit down with Nic Easley after the conference to get some better insights for how the industry performed in 2015 and what is in store for 2016.
CannabisIndustryJournal: How do you think Colorado’s year of pesticide recalls will help shape the industry’s future?
Nic Easley: As a member of the Pesticide Advisory Committee with the Colorado Department of Agriculture, I think there is a tangible need for better, more comprehensive regulatory guidance. If we come out with strict pesticide regulations, it will be better for everyone in the industry and consumers, but more importantly it will benefit patients gaining access to safe, laboratory-tested medicine. The regulators will need our help to write the rules. Harder laws are good for us though, because the ethical businesses will always take the route of integrity, as opposed to the businesses that cut corners. Those companies not playing above board will be weeded out and reprimanded in due time. A lot of it comes with the responsibility as a grower and producer to facilitate medical needs, that is a responsibility that requires great integrity. As for the testing regulations, there are too many conflicts of interest and we need to look toward third party testing and accreditation to prevent laboratory shopping, skewed results and other inconsistencies. We need to not allow producers to provide their own samples, sampling and sample preparation needs to be controlled through third party laboratories working above board, as opposed to labs wanting to keep clients instead of providing accurate and consistent test results. Looking forward to 2016, we will continue to see the pesticide issue shape the industry, for better or worse, this is a problem we need to find the right solutions for and that comes through working with regulators, like the Colorado Marijuana Enforcement Division, to write the required regulatory framework.
CIJ: Looking nationally, what major trends were highlighted in 2015 and what would you like to see change for 2016?
Nic: With Oregon going online October 1st, and Maryland’s license application process opening up, we are recognizing some diminishing barriers to entry in markets previously difficult to tap due to things like residency requirements and where the capital came from. Maryland’s infused product and processing licenses are much more readily available as opposed to the cultivation licenses due to stipulations. States like Oregon and Alaska that dragged their feet a little with regard to their regulatory model, are just releasing a lot of barriers to entry for licensing applications. Oregon may have missed some tax revenue in the initial launch of the program, but they are doing it right through diligent research instead of using their citizens as guinea pigs. For businesses looking to get started, you can avoid poor decision making by knowing the rules. New and established businesses alike need to take the responsibility to write the rules to be socially, environmentally and economically responsible. If we want to make money in this industry to help the government’s role in keeping us safe, then doing business in the most socially responsible way possible will lead to profitability. What I would like to see change for 2016 is the expanding list of qualifying conditions. As a military veteran, I would like to see Colorado stop looking at the tax revenue of adult use cannabis, and make PTSD a qualifying condition for medical marijuana. The Bob Hoban lawsuit suggests that Colorado is marginalizing medicine because they will make more tax revenue by blurring the lines of adult use and medicine. All of the studies out there, including Dr. Sue Sisley’s work, suggests PTSD can be treated with medical marijuana. That highlights another trend I would like to see change in 2016: We need clinical research on these conditions, because observational research just is not credible enough. We [businesses in the industry] need to actively promote the need for clinical research to help propel social change and get the information and knowledge out there. With the right information, this industry can make informed decisions that will help all stakeholders.
CIJ: What advice can you offer to cannabis businesses for 2016?
Nic: I tell my clients that, because cannabis is still federally illegal, you must understand the present risk associated with the work you are doing. We need to ask questions like how can we do this responsibly and set a good example so when the time comes, the federal government will look to us as a legitimate industry, working with regulators to write the rules for safety. For new businesses, produce the safest, highest quality, and affordable medicine and work with other businesses and regulators to keep innovating in the area of safety. Focus on the structure of your business: build your foundations and using expert advice, you can avoid major pitfalls and become the leaders in this brand new industry. Look for environmentally sustainable solutions, climate change issues need to be addressed in this industry. Use appropriate technology instead of burning coal to grow marijuana, which increases our carbon footprint. This includes both environmentally sound standard operating procedures and the right technologies, but also social justice. We are presented with a terrific economic opportunity to work on climate change issues, so work to address inefficient practices and innovate to be as sustainable as possible.
CIJ: For the entire cannabis industry in 2016 , what kind of growth do you expect?
Nic: We have reached a point where I foresee a holding pattern beginning to take shape. In 2016, the industry will continue to grow and demand will not be satiated by supply. August of 2015 was the first month when Colorado saw over $100 million in sales. We will increasingly see more price fluctuations as bigger projects come online. Many states in 2016 will focus on problems with their regulatory models and devising solutions for them. Businesses will continue their strategic growth planning, with key states potentially coming online for adult use such as Nevada and California. Nevada is one of the most up and coming markets in America with a 68% approval rating, and they have the ability to grandfather in businesses and previous rules associated with their medical marijuana program. Knowing licensing applications can take eight to eighteen months before you can become operational, we have to place our bets wisely. There is a lot happening in all these states and from the big November votes on, chaos will ensue as regulators tackle big problems with the overhaul. In 2016, the cannabis industry will make a big impact on the United States, and the exciting part is that progress is made through business as usual for us.
G FarmaLabs, a family-owned and operated business, has been operating in California since November of 2013, when they launched at a Marijuana Business Conference in Seattle that year. Ata Gonzalez, founder of G FarmaBrands and chief executive officer of G FarmaLabs, has been in the cannabis industry since 2009, cultivating in California and operating marijuana dispensaries, when he took notice of the changing industry and consumer trends shifting toward consumption of edibles and concentrates.
“Once the Cole Memo hit in August of 2013, the cannabis industry took off and so did we through a combination of great timing and well thought out regular market packaging and marketing,” says Gonzalez. “With our background in cultivation, we use quality flower as the foundation of our brand, and our proprietary cannabis oil formulations are the backbone of the brand, we use that oil to infuse all regular market edibles products.” They are vertically integrated, beginning with their cultivation of seven strains, so they monitor every blend going into their products and test for potency and pesticides in a consistent manner.
Another key ingredient in their brand recognition seems to come through great product diversity. G FarmaLabs has twenty flavors of infused chocolate bars, a variety of chocolate truffles, pretzels, brittle, chocolate covered cherries, teas, lemonades and other forms of infused edibles. They manufacture a variety of cannabis oil concentrates that come in a syringe to refill cartridges or put on your dry flower or joint but they also sell pre-filled vape cartridges, and pre rolled cannabis cigarettes called G Stiks.
Luigi De Dominicis, chief technology officer of G FarmaBrands, says their extraction process is another essential factor in the brand’s success. They run their raw plant material through supercritical fluid extraction (SFE) with CO2. “We do not use solvents like butane to extract our oil because CO2 is proven to be safe for both the operator and end user; we pride ourselves in putting out a safe and quality product,” says De Dominicis. “The same product that goes into our cartridges and syringes goes into our edibles with a different refinement process, which are all tested for potency, microbials and pesticides to ensure consistency, safety and quality.”
In building a successful recreational brand, their expansion model will play a crucial role in keeping their reputation for quality and consistency. David Kotler, Esq., regulatory counsel for global territories at G FarmaBrands, cites their licensing model as the primary distinction between G FarmaBrands and other large marijuana brands looking to expand across state lines. “We are trying to own and control every operation and keep it consistent with production and manufacturing versus giving up control via the licensing process and giving it to others,” says Kotler. This distinction means that G FarmaLabs producers and processors in different states will all operate under the same best practices regardless of location, ensuring consistency from one state to the next.
“While most states have some form of residency requirements, we are planning to grow organically and self contained, ideally expanding to areas where G FarmaBrands can hold licenses,” adds Kotler. For example, Maryland does not have a residency requirement in their licensing application so that is one of the states they are actively pursuing.
Moving forward, G FarmaBrands is positioning itself for national recognition. “It is difficult in this current regulatory state to state structure to have a national brand, but national recognition is certainly attainable through our great in-house marketing team,” says Kotler.
Running an expansion model of keeping everything very internal, along with their dedication to safety and quality, G FarmaBrands is very well-positioned to be the premier cannabis brand for the state of California, and possibly the nation. They recently harvested a crop in Washington State and in 2016, their products will come to market there. As GFarmaBrands attempts to expand into Maryland for manufacturing, cultivating and operating a retail dispensary, Gonzales keeps his mind set on sustainable growth through 2016 and beyond.
While nothing has changed in the legislation, it produces some confusion for small cannabis business owners and publications alike that are in compliance with state and local laws when running ads involving cannabis. The Washington State Liquor and Cannabis Board’s frequently asked questions page on their website explicitly contradicts federal law.
One of the questions on that webpage asks: “May I use direct mail to households and inserts delivered via the Seattle Times and other publications?” And the answer provided by the Washington State Liquor and Cannabis Board states: “Yes, inserts may not contain coupons.” This statement is clearly contradictory to federal law and to the memo sent by the U.S. Postal Service.
According to David Paleschuck, director of licensing and brand partnerships at DOPE Magazine, thinks this confusion will effect mainly small businesses. “As a business owner this tells me that it is OK to publish in newspapers like the Seattle Times which we all know is not directly delivered using the USPS.”
The memo does not directly affect DOPE Magazine’s distribution because it is not subscription-based. “We distribute via retail through dispensaries and recreational stores so it is not mailed directly to our readers,” Paleschuck says. “This will however affect many of our advertisers that are featured in subscription-based publications; Those companies and brands will not be able to advertise in publications sent through the postal service and thus non-subscription-based publications will pick up the slack.”
“States like Washington have very vague guidelines for marketing cannabis,” says Paleschuck. “There needs to more clarity for state and federal guidelines on marketing for cannabis businesses.” Moving forward, regulators will have to clarify these guidelines to determine how cannabis businesses can stay compliant.
Dawn Roberts, marketing executive at O.penVAPE, believes the memo will have a number of implications for her marketing strategies. O.penVAPE operates in nine states, manufacturing and selling oil cartridges and vape pens. “We are responsible for booking the advertising for all of our licensees to identify the best opportunities and provide support and direction for advertising and promoting their business,” says Roberts. “This [the U.S. Postal Service memo] affects our considerations for developing marketing strategies for all of the nine states we are in with regard to print publications.”
Looking at how the effects will impact their business development, Roberts needs to revisit every print publication they advertise in and check to see if it is subscription-based. “As a marketer for a brand that has a national footprint, I need to reevaluate my strategies for 2016 and look into certain publications that are subscription based,” Roberts adds. “We need to figure out how this will affect our marketing strategies for 2016.”
While this confusion gets sorted out, dispensaries and other cannabis businesses need to reevaluate their advertising and promotional strategies to stay compliant with federal and state laws.
Oregon was the second state to legalize medical marijuana in 1998 behind California that introduced legislation measures two years earlier in 1996. In the past two decades, Oregon has grown its medical market, treating more patients and producing exponentially more cannabis. Since October 1st of 2015, Oregon’s recreational sales have been made legal, creating potential opportunities for dispensaries to target this emerging market.
In that first week of recreational sales alone, dispensaries in Oregon made over $11 million in revenue. That figure is more than double what Colorado made in its first week and significantly larger than Washington’s figures posted.
Matt Walstatter, president and founder of PureGreen, a dispensary located in Northeast Portland, Oregon, says that while recreational customers are limited to seven grams of flower per day (no concentrates or edibles yet), they have noticed an uptick in sales of certain strains.
“Up until October 1st of this year, our sales percentages have been very consistent with about 66% to 72% flower sales since we opened and around 20% concentrates and 10% edibles, with the remainder consisting of topicals and non-medicated products,” says Walstatter. “Now we have an influx of a new type of customer so we do around 80% of sales in flower since the introduction of recreational sales on October 1st.”
When analyzing the top-selling strains, Walstatter’s figures show an inclination of customers and patients to prefer high-THC strains when buying flower. Girl Scout Cookies, a very high THC, low CBD strain, consistently sells the most at over 2000 grams per month. “People that smoke flower generally want high-THC strains, while people that seek CBD overwhelmingly do not smoke as much and prefer ingesting edibles, tinctures, capsules or other products with low THC content,” adds Walstatter.
PureGreen keeps a select few high-CBD strains on their shelves, including Cannatonic, which is known for its approximate 1:1 ratio of THC to CBD. “Out of twenty five strains on my shelves, I usually keep two or three high-CBD strains because they have their niche, even if they are less sought after, it is certainly worthwhile to carry them,” says Walstatter.
“Because Oregon has such a well established cannabis culture with less novice customers than other markets, our more popular strains are consistent over multiple months so we built a brand around knowledge and education,” Walstatter says. “Our budtenders usually come from a background involving the plant whether they were involved in cultivation, trimming or processing, and then they go through extensive training to be able to recommend certain strains for different ailments or preferences.”
Walstatter offered some tips for dispensary owners and employees at the Las Vegas Marijuana Business Conference in November where he sat on a panel with other industry experts called What Patients and Consumers Want: Strain Trends, Product Mix & CBD vs. THC. “Understanding your customer’s needs and their buying habits plus properly managing your inventory is the key to success,” says Walstatter. “We have a couple of exclusive growers that went through an extensive review process, they tend to rotate through different strains while we have some grower-specialists that grow only one strain very consistently.”
Walstatter prides himself in his team’s exceptional customer service. “People do business with people they know, like and trust, so authenticity is very important to us,” he adds. “Over delivering on value in the form of knowledge, expertise and service is crucial to growing your brand and business.” Having a high quality product mix, knowledgeable staff and inviting atmosphere are a few of the ingredients to running a successful dispensary.
“It can take up to six months or longer to bring a new strain from seed to sale, so if it is a popular strain, it is very important to have a backup grower,” Walstatter adds. He likens his dispensary to a farm-to-table restaurant where the menu is constantly changing: “This time of year, there are some greenhouse and outdoor crops that do well on the shelves but strains can go in and out of season.”
While edibles and concentrates are not yet available for recreational sales, state regulators are closely monitoring other state’s rules and progress to map out a timeline for their introduction. This would effectively create another new emerging market, opening up potential opportunities for dispensaries in Oregon to diversify.
Through a variety of networking and educational events, Women Grow brings together a community of established and new industry professionals that helps connect and empower women to grow their business and succeed in the cannabis marketplace. Jazmin Hupp, CEO and co-founder of Women Grow has been referred to as a “genius entrepreneur” by Fortune Magazine and was named one of the top businesswomen in the cannabis marketplace by Forbes. “Women can be very community and healthcare-minded, providing the backbone for establishing an ethical cannabis industry with a focus on health and wellness,” says Hupp.
According to data from the U.S. Department of Labor, women make approximately 80% of all healthcare decisions for their household. Not only is Hupp’s organization helping to empower women in the workplace and in leadership roles in the industry, it also teaches good business practices. “The primary demographic purchasing cannabis in the future will be women, because they purchase 90% of OTC medicine and do 80% of household buying,” adds Hupp. “Women are the leading purchasers of alternative foods, health and wellness products, and they drink more alcohol by volume than men.”
According to Hupp, women control the majority of consumer spending and will be looking for a safer way to recreate than consuming alcohol, and cannabis products will provide an answer. “If your target market is going to be driven by female spending, it just makes good business sense to put women in executive roles and on marketing teams,” she adds.
Because cannabis is still a schedule I narcotic in the eyes of the federal government, there are issues that involve more than just effective marketing tools. “Child Protective Services has the ability to deem a household with marijuana present unfit for children, largely due to the stigma and federal classification of cannabis,” says Hupp. “Mothers are particularly hesitant to get involved [directly in a cannabis business] because of the possibility of losing their children, hence why some mothers work on the ancillary side of the industry, as opposed to working directly with the plant.”
Women Grow is actively working to address these needs in America’s fastest growing industry on a national scale by advocating for the end of marijuana prohibition. “This is a brand new industry that can be conscious of social, economic, and racial injustices so there are no glass ceilings for women or minorities,” Hupp says. “This comes out of a very socially conscious movement where leaders understand the benefits of inclusion, diversity, and the importance of socially responsible decisions.”
With the cannabis marketplace still in a nascent stage, opportunities to support diversity and inclusive business practices makes this industry particularly unique.
The Herbery, a dispensary with two locations in Vancouver, Washington, is currently awaiting medical endorsements from the state for both locations. The two co-founders, Jim Mullen and Rick Zahler, found a credit union to work with them, Salal Credit Union in Seattle. “There are five dispensaries in the Western part of Vancouver, so it is quite a saturated market,” says Jim Mullen. “But we have drawn considerable business and are very happy with the success of our two locations.”
It has not always been like that, says Mullen. There are several key ingredients that go into launching and operating a successful dispensary, all of which pose significant barriers to entry in an extremely competitive retail market. Rick Zahler won the second and third positions in Vancouver for the state i502 retail licensing lottery. Zahler has more than 40 years of experience in franchising restaurants, a background that gives him a competitive advantage in scaling up his business.
Mullen and Zahler formed a partnership in early 2014 and by that summer they had finalized their lease agreement, converting an old restaurant into their flagship store. They hired local architects, contractors, and CPA’s and began looking for staff. “We set out to find the best people who could provide a level of customer service that this industry needs to be recognized as a mainstream business,” adds Mullen.
“We are changing the perception that you have to go into some back alley store to buy your pot,” he says. “We have a very attractive, well-lit storefront; we get complimented on the look of our stores all the time, one woman called us the Nordstrom’s of dispensaries.”
Before the doors opened, Mullen and Zahler worked long and hard to find growers, manufacturers and processors that met their standards. “We wanted to fill our display cases and shelves with premium cannabis, so we found really high-quality indoor, outdoor and greenhouse grows across the state,” says Mullen. “We go out and do site visits to see firsthand what nutrients they use, along with their standards and practices, to really size up our suppliers and verify they are giving us safe and high-quality products.”
“Our competition received a lot of media coverage and brand recognition early on. We had to side-step that with heavy guerilla marketing including handing out cards and flyers on street corners,” says Mullen. “We continued to push our social media marketing campaigns, slowly building a clientele with quality products, affordable prices and good customer service.”
Of all the roadblocks they hit, Mullen said the toughest aspect of getting started has been simply “letting people know that we opened and where we are.”
“There are fairly strict marketing rules, and staying compliant is difficult when you are trying to get your name out there,” Mullen adds. “We have been doing what we can with billboards and ads in magazines, but really word of mouth has gotten us far.”
Looking forward, Mullen wants the ability to market in a manner that is similar to other mainstream businesses. He is also excited to get endorsed to sell medical cannabis. “With so many people seeking high-CBD products for a variety of conditions like fibromyalgia, chronic pain, anxiety, and more, we want to help patients get access to the medicine they need.”
As cannabis continues to be studied for its true benefits, Mullen anticipates significant advances in knowledge to occur within a very short timeframe.
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