August 5, 2019 | By: Michael Stone, Co-founder and Chairman of Beanstalk

Part Two: Cannabis.

This is the second of a three-part series about product categories that have recently re-invented themselves due to cultural, societal, technological and political trends. Categories where the economics intersect with the trends. Part One in the series examined the plus-size fashion category. Part Two examines cannabis.

It wasn’t so long ago that selling, using and possessing cannabis was illegal nationwide, whether in the form of marijuana flowers, edibles or concentrates. But there was a cultural shift, societal norms changed and the political winds set a new course. The entire product category was “re-invented” for today’s marketplace and consumer and we are in the midst of what has been called “the green rush.” Today, recreational cannabis is legal in 11 states (Michigan was the latest state to legalize cannabis on June 25, 2019) and the District of Columbia. And let’s not forget our neighbor to the north, Canada, where cannabis was legalized in 2018. By 2022, sales of legal cannabis are expected to exceed $20 billion, according to Arcview Market Research and BDS Analytics. Sales of CBD, short for cannabidiol (the non-psychoactive ingredient in cannabis), and hemp oil (which contains CBD) in the United States grew by 57% in 2018 to $238 million. And three out of four chefs in the United States have identified CBD- and cannabis-infused foods as a strong trend that will continue in 2019, according to the National Restaurant Association. Cannabis has been around for a very, very long time but has only recently come out of the shadows and become a vibrant, market-based industry. What happened and why? It’s about the intersection of economics and a changing culture.

Marijuana is a plant that was used medicinally for thousands of years and recreationally for a long time as well. It was widely and legally available in the United States until Congress passed the Marijuana Tax Act in 1937 making cannabis much more expensive to obtain. It was made totally illegal when it was included in the Controlled Substances Act of 1970. Cannabis then began its slow exit from the back room in 1995 when California legalized medical marijuana for compassionate use patients. At the time, according to a Gallup poll, 25% of adults favored legalization. By 2018, 29 states had broad medical marijuana laws in addition to where it was legalized for recreational use. The same Gallup poll, in 2017, found that 64% of adults favored legalization. In addition to the 11 states where it is already legal, other states, such as New York, New Jersey and New Mexico are currently slated to consider legalization this year. Despite legalization at the state level, cannabis is still not legal under Federal law and remains a Substance 1 drug (although legislation has been introduced to downgrade that categorization). Further, last December, the Agricultural Improvement Act of 2018 (also known as the Farm Bill) was enacted which, among other things, legalized the production of hemp by removing it from the Controlled Substances Act. And the Food and Drug Administration started holding hearings on May 31, 2019, on potential regulatory pathways for cannabis-containing and cannabis-derived products.

When evaluating the cannabis category there are basically two paths to consider. There is CBD, the legal compound in cannabis plants that advocates say delivers the calming benefits of marijuana without the high that comes from the other path, THC – the psychoactive ingredient in cannabis. CBD has less of a stigma attached to it, and its popularity is more consumer-driven than industry-driven. Both CBD (nationwide) and THC (where legalized) are being aggressively marketed. However, despite the number of companies, brands and retailers that are jumping on the CBD bandwagon, claiming that it has a multitude of benefits, including anxiety reduction (likely the most popular reason people use CBD), pain relief, anger management, arthritis relief and better sleep, among others, there is a dearth of research on its benefits and risks. Other than one drug for epilepsy, the FDA has not approved any CBD drugs. Indeed, with most of these products the claims about what they can do are necessarily ambiguous. That’s because the FDA prohibits unproven health claims. But the internet is abuzz with the health benefits of CBD. Without much research, consumers are actually creating the “laboratory” through their own use of CBD. CBD has thus become a drug for a serious illness (epilepsy), a wellness drug and a recreational drug.

But let’s take a look at some of the market activity that has transpired in just a few short years. First, products containing THC can, of course, only be sold in the 11 legal states (and the District of Columbia), as well as Canada. Nevertheless, there has been a lot of market activity in anticipation of further legalization, despite very few regulations and no banking guidelines. Celebrities were the first to attach their names to marijuana products, where growers and marketers need to differentiate their products. Snoop Dogg was among the first to market with his line of products (including CBD-infused products) named “Leafs by Snoop,” followed by Willie Nelson (Willie’s Reserve), the Bob Marley estate (Marley Natural), Whoopi Goldberg (Whoopi & Maya), Seth Rogen (Houseplant) and Chong’s Choice (Tommy Chong of Cheech & Chong). Francis Ford Coppola, Mike Tyson, Jimmy Buffet and David Crosby have recently announced launch plans as well. CBD-infused products are being launched by Greg Norman (personal care products), NFL Hall of Famer Terrell Davis (sports drinks), Cesar Milan (pet-friendly aromatherapy products). Kathy Ireland is offering CBD gummies, lotions, oils and tinctures under various brand names including Kathy Ireland Health & Wellness. And even home and entertaining diva, Martha Stewart, has partnered with Canopy, the largest cannabis grower in Canada (I’m not sure where that partnership is headed).

Of course, cannabis dispensaries are opening in the states where recreational marijuana is legal. I had the opportunity to visit Planet 13 in Las Vegas in early June. It’s a 40,000 square foot retail store (with 16,500 square feet devoted to selling space) that reminded me of an Apple Store. It’s modern and contemporary, well-designed, and all of the product is under glass. Knowledgeable employees in red polo shirts called “budtenders” will help you understand the products and find what you might be looking for or find what you didn’t know you were looking for. As I said, it’s like walking into an Apple Store, only the products are various strains of marijuana and CBD- and THC-infused products, instead of iPhones and Macs. Planet 13 has just announced plans to open a second location in Los Angeles.

Apps are appearing to gauge THC impairment (My Canary) and compare prices (Wikileaf). Leafly is the largest cannabis website in the world, and there are many other online newsletters such as Ganjapreneur. And, of course, High Times magazine has been the publication of choice for the cannabis counter-culture since it first appeared on the scene in 1974. But perhaps most important, mainstream CPG companies and brands are slowly jumping in as well, although many are on the sidelines trying to figure out how to navigate this landscape. In 2017, Netflix opened a pop-up shop in West Hollywood selling 12 strains of marijuana based on 10 of its television programs (working closely with the State of California). Constellation Brands (maker of Corona and other alcoholic drinks), InBev (maker of Budweiser) and MillerCoors have all announced plans to develop cannabis-infused drinks, as has Heineken with cannabis-infused water.

The rush into CBD-infused product and marijuana accessories, is even more pronounced. CBD is showing up in all sorts of health and beauty and food products, selling at coffee shops, farmer’s markets, mom-and-pop shops, department stores, drugstores and online retailers. For instance, CBD Einstein is an online and brick-and-mortar retailer selling CBD products with delivery in New York City. Lab to Beauty is a line of CBD-infused face washes, masks and moisturizers. Iconic high-end retailer Barney’s has opened a shop-in-shop in its LA store named “The High End” (which it intends to expand to other stores), featuring the line, as well as pricey, stylish paraphernalia such as $1100 bongs, $1400 cannabis grinders, artisanal French rolling papers and pre-rolled joints and edibles which, although not offered for sale physically in the store, can be ordered and delivered to a customer’s home. There’s even a “cannabis concierge” to help you. Bed, Bath and Beyond features a front-of-store display at some stores selling CBD-infusers, and both Walgreen’s and CVS have announced plans to sell CBD products in some states. Other CBD-infused products on the market or coming soon include shampoos, lattés, body oils, chocolates, marshmallows, gummy bears and dog treats and oils. And the list goes on and on and on.

CBD products are also coming to a mall near you! A company named Green Growth Brands has made a deal with Simon Properties and Brookfield Properties that will give it access to over 100 and 70 prime locations, respectively, in malls across the United States. Five Seventh Sense CBD stores have already been opened and hundreds are planned, largely focused on CBD-infused personal care and beauty products.  Green Growth has also announced plans to sell its products in 160 Abercrombie & Fitch stores, 500 American Eagle stores and DSW stores. The company plans to have 280 locations open by the end of this year. Other retailers such as Neiman Marcus and Sephora are all offering CBD-infused products, generally focused on the health and beauty category. CBD-infused products were even included in this year’s gift bag at the Academy Awards Ceremony. As the efficacy of CBD becomes more clearly defined and quality control (which is currently a problem) becomes more disciplined, as will surely happen, expect to see even more companies and retailers joining the bandwagon.

Moreover, the cannabis trend is having a ripple effect on other products that don’t contain CBD or THC. For example, a recent study by The NPD Group determined there has been a significant increase in snack food consumption in states where cannabis is legal compared to the years prior to legalization. While NPD cannot conclude that there is a direct cause and effect, they do consider this to be a “correlation” and, of course, aligned with what we always seemed to know anecdotally. A number of brands used April 20th, National Weed Day, for marketing and promotional gimmicks including Pizza Hut, Ben & Jerry’s, Topper’s Pizza, among others. A Carl’s Junior restaurant in Denver even sold a Rocky Mountain High Cheeseburger Delight.

However, other than some big players entering the CBD product marketplace and a few others with cannabis-infused products, big, national brands have generally stayed away, largely because of federal laws and banking restrictions. And this fear has extended to most of the big marketing and advertising agencies. Thus far, brands have been more local and the agencies that are helping to market those brands are smaller, independent agencies. For example, PRØHBTD is a hybrid consumer goods and content company that creates and markets lifestyle and wellness cannabis brands (including CBD and hemp products), which are either owned by the company or by clients. (Disclosure: PRØHBTD is a client of Beanstalk, the brand licensing agency of which I am the Co-Founder and Chairman.) Cannabis companies are also turning to influencers to help market their products, and there are a number of cannabis influencers (many Gen Z) with large followings. But when the federal laws change to at least free up banks (legislation has already been introduced), things will start changing quickly. Cannabis is basically a commodity product. Commodity products need brands to represent quality, safety and differentiation and make purchasing decisions easier for the consumer.

 And then, of course, there’s Gen Z, the largest generational wave of consumers who, at the older end, are now coming out of college. Gen Z’s shopping behavior, eating preferences and media habits will drive trends and change many product categories, including cannabis. They are coming of age at a time when cannabis is being legalized, and they carry no baggage of the marijuana stigma. To Gen Z, cannabis is healthier than alcohol. They are already twice as likely to use cannabis than the national average (Business/Morning Consult survey, 2019).

And that, briefly, is what’s going on in the marketplace. The reasons are obvious. The legalization of cannabis is spreading, both THC and CBD are coming out of the shadows and consumers are letting go of the stigmas attached to these products while embracing real and perceived benefits. These are powerful cultural and societal trends. But there is a lot more driving this re-invention of a product that has been around for thousands of years.

There are strong economic and political forces driving cannabis’ emergence as well. First, tax revenue – billions of dollars are available for state treasuries. Second, jobs – both directly through any business involved in the cannabis supply chain, from farmers to retailers, and indirectly through ancillary businesses, such as consultants, financial advisors, marketing agencies and construction firms. Third, significant investment opportunities – retail and investment analysts as well as private venture firms are already starting to treat cannabis as an industry on its own. A listing of a company on the New York Stock Exchange cannot be too far away. Fourth, law enforcement savings – fewer court cases and fewer incarcerations. Generally, there are about 700,000 arrests annually related to cannabis. And, fifth, dropping prices – that means more affordable medical marijuana. People with varied interests, not just consumers who use or want to use the product, have been advocating for change, for a variety of reasons that have all come together. We are also starting to hear murmurs about diversity. It seems that there are very few cannabis or CBD companies owned by African Americans, a population which has borne the brunt of the legal system wherever marijuana has been unlawful. Expect to see laws and movements designed to encourage minority-owned businesses in this space.

As more states legalize recreational cannabis and as the efficacy of CBD becomes more apparent, the space will evolve like any other industry. Entrepreneurs and mainstream companies and brands will jump in to feed consumer demand and fill the niches, all with significant meaning to marketers and to existing brands. For companies serious about creating profitable, long-term relationships with consumers in this category, brand names – either new or existing – will be needed, developed and marketed (it has already started). Increasingly, companies are dipping their toes in the water. Many will be cautious given the newness of this category and given the legal complications, as well as the fear of offending portions of the population. However, due to the shifting social, cultural, and political winds, intersecting with positive economics, this category is here to stay. And it will grow.

Look for Part Three – eSports.