What Cannabis Can Learn From Craft Beer and Ice Cream

Columns - Technically Speaking

Pursuing the opportunities and managing the problems in today’s cannabis industry will help you find success in tomorrow’s more competitive market.

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The American market is undeniably the largest the world has ever seen and is likely to remain so for a very long time. Look at it this way: We can each produce something, then sell it in the same language and using the same currency across a jurisdiction spanning nearly 3,000 miles. In terms of geography, there is no other market like it and never has been. Given that America is a $20-trillion economic powerhouse, we are also unlikely to see any other economy nearly as valuable. The opportunity to sell into that market is why everyone wants to bring their products to the U.S., no matter what market cap their companies currently have.

While an ongoing flood of companies, most notably conglomerates, entering the U.S. market may incite fear, we prefer to look at the opportunities as we perceive them.

Niche products that have gained access to the U.S. market and have prospered include Ben & Jerry’s, Honest (maker of Honest Tea, among others) and Tom’s of Maine. Sierra Nevada used to be a craft beer company, and KIND used to be a niche health food company. Companies like Trillium Brewing Company in Massachusetts and Vermont’s Alchemist are now at craft scale, while Sierra Nevada and KIND have grown to be larger operators.

What each of these current and former niche businesses have in common is an understanding of their existing and potential customers. In the context of the American market, each of these players learned to understand its customers and to deliver what these customers wanted. Each of these success stories features a company that gained the confidence and trust of a large part of its potential market. By the time the larger players in their respective industries became aware of these niche brands, the larger players had to either live with the niche players or try to acquire them. Once the niche players had gained the confidence and trust of American consumers, the large players could do very little about it.

The question for the cannabis industry is whether we can do the same thing in our industry before Big Pharma, Big Alcohol or Big Tobacco figure out how to gain the confidence of our natural market with products similar to our products before we do.

The First-to-Market Advantage

It appears to us that we, as current operators, have the advantage of being first into this market. Our products are not easy to handle, and our market and our customers have their quirks. The big guys will throw their money at the problem by bringing in their marketing experts and focus groups to try to understand our market’s customers. We do not believe the big guys can do this any more quickly or more effectively than current cannabis businesses can. We believe that we can deliver the products, the packaging and the labeling that our customers want better than the big guys can.

We are not saying that this will be easy. Today’s cannabis businesses will have to work to understand their markets better than they do now. Some of this market, in particular some of the larger conventional American consumer market, will be strange to us. That is, some of our potential market will be entirely new to whatever we might call the “cannabis experience.”

Nevertheless, we have a head start. We know our natural customers, and we know the nuances of our products that we will have to explain to new customers. This means that current operators should be able to do the focus groups and the marketing better than the big guys. It seems to us that this is exactly what Ben and Jerry’s, Sierra Nevada and other companies like them have done.

Furthermore, we have an extremely large market to motivate us all. We should be able to exploit market niches within our markets and, indeed, to exploit the entire market before the big guys can.

On the whole, we believe that they have more to fear from us than we have from them. We all know that they could spend an awful lot of money going down rabbit holes in this industry and end up with nothing. The big prizes will mostly go to the companies that learn how to create and serve American customers. Those should be our companies.

Build Trust, Reduce Costs

We have recognized certain significant cost drivers that, within the American market, are unique to the cannabis industry, including one of the biggest thorns in the side of producers: mandatory third-party testing.

Mandatory testing is required of conventional food, beverage and drug producers, but they all do their testing in-house, subject to FDA audit. Even after absorbing the costs of internal testing, bringing that testing in-house would save our company (Connecticut Pharmaceutical Solutions) roughly $400,000 per year in comparison to the costs of independent third-party testing.

To bring testing in-house, we would have to do a lot of work to convince both our regulators and our customers that they could rely implicitly on our in-house testing. Furthermore, our legitimacy in our customers’ (and regulators’) eyes is invaluable and must never be subject to question. Nevertheless, we have several hundred thousand dollars of motivation regarding this issue.

Another area for very large potential cost savings is tax reform, specifically with respect to Section 280E of the Internal Revenue Code. If the big guys get into this industry, we can expect them to talk to politicians through their lobbyists about how many people they employ and about how important their industries are to local economies to persuade them to revise these unfriendly codes.

This perhaps is the biggest advantage larger companies have over current cannabis industry operators: They already work together. They generally do this through large industry organizations. The cost of that unification is that even big guys like Procter & Gamble, Johnson & Johnson or Unilever can’t simply go their own way, no matter how big they are. They have to figure out how to cooperate as to their common industry interests, which tend to overwhelm their competitive interests. No matter how big they may be, they would never fight 280E as individual companies, but rather as an industry. They would present a united front as an industry that contributes a great deal of money to the American economy and that employs a large number of people. They would direct their lobbyists at a common target.

Our industry already has multiple associations and lobbyists, and already employs a lot of people. Presenting ourselves with a unified voice as the source of legitimate product and as significant to local economies, however, remains a challenge. So long as we leave legitimacy and economic significance to the big guys, we will be exposed on that front. We would like to control product legitimacy and economic significance from the high ground. We already know about regulation. We already know about testing. We already know how to hire lobbyists. From our point of view, our industry should be the one to remove Section 280E from the tax code. This will take a unified industry. We will need producers working with dispensaries, dispensaries working with producers, and industry organizations that help us to work together.

With the exception of cooperation, we see those big guys as no better than we are and probably not nearly as good.

The Value of Getting It Right

We argue that the door is open for us to be as sophisticated as any big company or as any big industry in working together politically to do something that benefits all of us, all of our communities, and all of our customers. We can do all of this as a legitimate industry that employs thousands of people, contributes its more-than-fair share of taxes, and supports the growth of the entire economy.

We acknowledge how esoteric this sounds. It sounds like a lot of effort for something other than this month’s revenues and profits. But either we control these matters, or we leave them to someone else to control. As Aristotle said: Nature abhors a vacuum.

Thomas Schultz: President, Connecticut Pharmaceutical Solutions (CPS), CTPharma.com

Rino Ferrarese: COO, Connecticut Pharmaceutical Solutions