Cannabis entrepreneurs hoping to succeed in a sector that’s expected to be worth billions of dollars in sales need to understand the power of brands.
The industry is expected to follow one of two models as more U.S. states legalize cannabis for medical or recreational use. For some, that’s the alcohol model, in which branded product is distributed to retailers. Others are expecting a retail-brand model, in which the seller controls how the brand is produced and presented to the public.
For Smoke Wallin, president of Vertical Cos., a California-based cannabis company with some big ambitions including a plan to take its wellness unit public, it’s a no-brainer.
“Cannabis is going to evolve just like every other packaged-good category,” Wallin told MarketWatch in an interview. “There are dozens of form factors, including topicals, smokables, beverages, edibles, and within edibles there are baked goods, tinctures, mints — our belief is that with each form factor certain brand sets will emerge.”
Wallin should know. A former chairman and president of the Wine and Spirits Wholesalers of America, his long career in the alcohol business started at National Wine & Spirits, which he helped grow into a $1 billion company with more than 36,000 retail customers and a workforce of 1,500.
‘Cannabis is going to evolve just like every other packaged-good category. There are dozens of form factors, including topicals, smokables, beverages, edibles, and within edibles there are baked goods, tinctures, mints — our belief is that with each form factor certain brand sets will emerge.’
“Vodka has no taste or smell, so how do you persuade customers that one type is better, or even different, than another? It’s all marketing,” he said.
Vertical’s strategy is to create a portfolio of what it expects will be the biggest cannabis brands, once the burgeoning sector matures. The U.S. cannabis sector is expected to be worth about $20 billion by 2022, or up to $50 billion if cannabis were fully legalized for recreational use as it is in Canada, according to GMP Securities analyst Martin Landry.
Vertical already has more than 35 brands of THC-based products, and more than 50 brands of CBD-based products in development.
THC and CBD are ingredients found in the cannabis plant; THC is the psychoactive ingredient that creates the “high” associated with cannabis, while CBD is nonintoxicating but is widely held to have wellness benefits.
The Vertical portfolio includes brands such as Instant CBD Strips (InstantCBD); Trees by Game, the brand associated with West Coast rapper The Game; Taos; JSLV (Just Live CBD products); Kaviar; Evergreen Organix; and Nanosphere Evolve. The company’s strategy is for each brand to have a specific target customer, creating the next Bacardi, Grey Goose and Johnnie Walker in the cannabis space.
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Vertical is currently active in three states, California, Arizona and Kentucky, and recently completed a grow facility in Ohio.
The California operation includes a 29-acre campus in the city of Needles in eastern San Bernardino County, with a 40,000-square-foot building, a 20,000-square-foot building, a 7,000-square-foot extraction and manufacturing building, a 5,000-square-foot commercial kitchen, a 10,000-square-foot distribution center and the space to add eight more buildings on the land.
The company’s outdoor grow facilities in California produced 20,000 pounds in the last 12 months. Its 60,000 square feet of indoor facilities are expected to produce 10,000 pounds a year. It recently purchased a 575-acre ranch in Santa Barbara County and expects the next grow on 50 acres, to produce at least 4 pounds per acre, or 200,000 to 250,000 pounds a year.
In Arizona, Vertical has a 52,000-square-foot indoor grow facility in Kingman. It has a 90,000-square-foot hemp manufacturing, production and processing facility in Cadiz, Ky., on 14 acres of new land. The hemp production is for the company’s Vertical Wellness business, which was spun out of the parent late last year following the passage of the 2018 Farm Bill, which legalized hemp throughout the U.S.
The company is planning to take Vertical Wellness public in the third quarter and is aiming to list on the Nasdaq, raising the funds needed to develop a range of hemp-based CBD products. The wellness unit will be allowed to trade on a major exchange because it doesn’t “touch the plant,” meaning its activities are not subject to the federal ban on cannabis.
Vertical Cos. closed a $58 million Series A funding round in April to help it expand its footprint and brands, with much of that money coming from family offices and high-net-worth individuals, as institutional investors remain wary of the sector, because of the federal ban. Investors in the round included Merida Capital Partners, a private-equity fund with a focus on the cannabis sector, whose managing partner Mitch Baruchowitz is now on the Vertical advisory board.
The company is vertically integrated, meaning it grows cannabis, extracts ingredients, makes and distributes products, but it’s not planning to have a big retail network. Vertical will have a limited retail presence, with stores to be used “opportunistically and for R&D purposes. Retail is not a core business,” Wallin said.
The company is building a team of sales consultants and brand ambassadors to educate and develop relationships with retailers. It’s the Jack Daniel’s model — because Jack Daniel’s is wanted in all alcohol accounts, their distributor has to service all of those accounts, exactly what Vertical wants to achieve in cannabis.
The company is expecting revenue of $100 million in 2019. Vertical Wellness alone is expected to generate $28 million of revenue this year, growing to $400 million in 2020. The company expects the unit to be profitable on a net basis in 2019.
Wallin is unfazed by the current regulatory uncertainty about CBD, which was not legalized with hemp in last year’s Farm Bill. Instead, regulation of the substance was moved to the Food and Drug Administration from the Drug Enforcement Administration.
The FDA immediately warned companies that it will not allow CBD to be added to food and beverages, because it is the main ingredient in the only cannabis-based drug to win FDA approval, GW Pharmaceuticals PLC’s GWPH, -0.58% Epidiolex, a treatment for severe types of childhood epilepsy. That makes it a drug in the eyes of the regulator. The FDA is planning to hold public talks on the issue of regulating CBD on May 31.
The FDA has been cracking down on cosmetics and topicals too, in cases where companies make claims to treat major illnesses. Last month, the FDA along with the FTC sent warning letters to three CBD companies, charging them with violating the Federal Food, Drug, and Cosmetic Act and the Federal Trade Commission Act for putting unapproved human and pet drugs into interstate commerce and making unsubstantiated health claims about them, according to Cannabis Law Report.
“We want it to be regulated, because there’s so much bad product out there, including many that don’t contain the CBD they claim,” said Wallin. “We need clarity on the rules, and we need visibility in the supply chain. Consumers are buying CBD online and don’t know what they are getting, so, yes, we would welcome regulation.”
Wallin is confident that the increasing acceptance of cannabis among Americans will help drive sensible legislation, including a lifting of the federal ban. In the current political climate, it “might be the only issue that we can all get behind,” he said. “We’re in it for the long game.”