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Cutting through the CBD hype

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CBD Industry Hamstrung by FDA’s Continued Lack of Direction

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Recent articles at Axios and the Wall Street Journal lay out the current state of play in the CBD industry. Basically, the CBD industry is at a standstill because the Food and Drug Administration (FDA) still hasn’t come out with rules and, worse than that, the little that they have said is to warn consumers about the potential drawbacks of CBD-infused foods and drinks.

This is beneficial to CBD startups in that the FDA’s warnings will prevent larger companies, such as Coca Cola and Pepsi, from entering the market at the moment but it’s not all positive for startups. The problem for startups will not be in having large food companies entering the marketplace, which is good, but rather the fact that it may become more difficult for startups to find large distribution partners.

Over the holidays, I did see CBD-infused products at Kohl’s while I was returning something from Amazon, so there are at least some retailers that are willing to take a chance on CBD products. Their thinking probably goes something along the lines of “CBD will be a big market and we want to get out in front of that” but if the FDA comes out with something more than notes of caution then you can expect those retailers to at the very least curtail their CBD-infused stock.

CBD Mania

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Look at that picture; that’s a really small sample of the news items from Google about CBD. The New York Times just published an article about how the CBD industry has lax oversight; a Former FDA chief says that putting CBD into food is illegal; Ars Technica discussing how the FDA is responding to fallacious claims. Then you go down a little bit further in the page and there are more stories about the legality of CBD, one story about how jumping out of a plane turned a CBD skeptic into a CBD proponent, and a piece from LA Magazine about how CBD marketers have become “snake oil salesman”.

My deepest concern here is that the narrative has drastically gotten away from the companies that are being responsible and trying to make legitimate claims about their CBD products and, instead, has been hijacked by unscrupulous companies that are looking to cash in on the CBD mania while the getting is good.

And whether that is the case, or, more accurately, how prevalant are the “snake oil salesman”-esque marketers out there? And does that even matter? I ask that last question because the media can latch onto a few key data points or spokesmen and paint whatever picture they want. If you want the CBD industry to look bad there are probably ample examples of companies that are being downright dishonest in their marketing.

What should CBD companies do? Continue to be truthful in your marketing. Push for fair and clear regulations for the industry. Keep the conversation with customers going and bring attention to the successes and the failures.

Is the CBD Industry Overheating?

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We have talked at length about the upside in the CBD industry since our inception a few months ago. A lot of people agree and a lot of money is flowing into this industry… but is that a smart move?

Here’s a clear picture of the current CBD investment psychology:

“Leading cannabis researchers BDS Analytics and Arcview Market Research, project that the collective market for CBD sales in the U.S. will surpass $20 billion by 2024.

“The convention-goers were more keyed on this figure, and less worried about potential push back from anyone looking to enforce state law or agencies like the Food and Drug Administration.”

Depending on your appetite for risk, this sentiment either makes perfect sense or is a clear sign that the CBD industry is going through something of a mania. What do I think?

I think there will be some pure startup winners all along the vertical but that most of the pure startups will end up failing (this is normal for startups in every industry but I think that the failure rate here will be higher than most industries. Those that are able to survive can realize huge returns on investment, more so than in many other industries.). I still think that the industry will go through an aggressive consolidation phase over the next few years, as can be seen from our story earlier about HeavenlyRx.

Going back to the point of this post, the reported sentiment at that convention does give me pause for concern. There are a lot of people who have no consumer product, much less CBD industry, experience getting into the industry. That’s a risk from an investment standpoint. Some of these CBD companies started by neophytes will work but I think the vast majority of them will fail.

The lack of clarity on regulations is also a risk. Sure, everyone, including us, thinks that the writing is on the wall and that CBD products will be legalized across the board… eventually. In the meantime, we’re not sure what the FDA will do and who knows what each state will do when it comes to regulating CBD products.

A few days ago, the FDA sent a shot across the bow to CBD company Curaleaf telling them that they have 15 days to get in line with FDA requests, including changing their medical claims, or else.

“As a result of this warning letter, which will require Lusardi’s response to correct these deficiencies within 15 days, Curaleaf lost its topical partnership with pharmacy giant CVS Health (NYSE: CVS). As a reminder, CVS Health announced in March that it would carry Curaleaf’s topical products in roughly 800 of its stores in eight states, with CBD expected to be a means for low-margin pharmacy chains to drum up foot traffic to their stores. It’s unclear if CVS will look elsewhere for its CBD supplies, especially with Walgreens Boots Alliance and Rite Aid following suit with cannabis products in their own stores shortly after CVS.”

Scott Gottlieb, a former commissioner at the FDA, has suggested a pathway forward for the FDA regulating the CBD industry:

“The FDA could put the onus on manufacturers to bring forward petitions to demonstrate that CBD can be safely added to products such as food. These submissions can take the form of new dietary ingredient notifications or food additive petitions, which would include toxicity studies to evaluate the safety of CBD. These are the same standards any new food ingredients are held to. Congress can help by passing language saying that the FDA doesn’t need to issue a broad regulation on CBD and can instead rely on petitions filed by individual, prospective producers.”

It’s entirely possible, maybe even likely, that the FDA will do something along those lines. They could punt this issue, allowing limited ways to sell, and wait for clinical studies. Remember, the FDA has no incentive to act quickly here, they only look bad if they approve something that turns out to be unsafe.

Taking all this into consideration, I think you can make a good argument that entrepreneurs and investors are getting a little overly optimistic. I still think that there is tremendous upside in this industry but if the FDA throws a wrench in the machinery then you can kiss those projections goodbye.

Massachusetts Department of Agricultural Resources Bans Most CBD Products

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If you are benefitting from CBD products in Massachusetts then you should start exploring other options because the Massachusetts Department of Agricultural Resources just released regulations banning most types of CBD products. From their policy statement:

“The following products are NOT approved for sale:

  • Any food product containing CBD;
  • Any product containing CBD derived from hemp that makes therapeutic/medicinal claims;
  • Any product that contains hemp as dietary supplement;
  • Animal feed that contains any hemp products;
  • Unprocessed or raw plat material, including the flower that is meant for end use by a consumer.”

Couple this with the fact that people can sell consumables with THC and you shouldn’t be surprised to find out that farmers, retail businesses, and consumers are not happy with this decision. From WCVB5 “‘An absurd dichotomy exists in the state today where you can legally produce and sell cannabis consumables, but you cannot legally produce and sell hemp consumables,’ Jim Borghesani, who served as spokesman of the 2016 ballot initiative that legalized marijuana, said.”

Why CBD Bans Continue in Some States

Honestly, I have no clue why this sort of thing happens. Since CBD is not psychoactive, why lower the regulatory boom? One possible reason would be that there are efforts being made by other industries, potentially cannabis, to tap the brakes on the CBD market.

More likely, my guess is that no governmental organization, whether it is the Massachusetts Department of Agricultural Resources or the FDA, wants to take the lead on this. Imagine this: The Massachusetts Department of Agricultural Resources approves CBD consumables and four days after that some kid chokes and dies on a lollipop laced with CBD. Of course the CBD didn’t have anything to do with the untimely death of this fictional child but there will be other people who will automatically point their fingers and cry hysterically about how CBD took this child from us.

Regulators would lose their jobs, they would miss out on any private sector sinecures that they had coming to them, and for what? It’s not like if a regulator drafts regulations that allow for the sale of products that can help people that regulator will reap any rewards from that decision. In other words, there’s not much of an upside for regulators to approve the sale of something new (and controversial) but there certainly is a downside.

What can the CBD industry do about this? Education is the boring yet most likely to succeed option. Keep on educating the public about how CBD, at the very least, doesn’t have any serious side effects and it looks like it does have at least some positive effects on people.

(And by education, we of course mean political leverage. The more people who are for CBD and are willing to base part of their voting decisions on where politicians stand on this issue can have a dramatic impact on CBD policy.)

Facebook CBD Ad Ban

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According to an article on The Verge, if you try to advertise your CBD products on Facebook you are likely to get your ad account disabled (and maybe even your business page completely deleted). For many businesses, that would be a serious blow, so it’s not worth testing the Facebook ad police unless your whole business is about CBD.

And, according to at least one account from The Verge article, Facebook deleted one person’s entire business account: “I tried to log into Facebook, and my entire account was deleted. Like I didn’t just lose ads. They deleted my entire business account — like hit the delete button,” Rudis says. “No warning, no email. No, ‘you’ve screwed up,’ no 30-day slap on the hand, literally hit the delete button, and my entire business account was gone.”

Again, unless your whole business is about selling CBD products, then don’t buy ads on Facebook to promote CBD products. In fact, even if your whole business is about CBD, it still does not make sense to try placing ads on Facebook that have anything to do with CBD. You are better off waiting for Facebook to come around to the times and allow for the advertising of CBD products on its platform. My best guess is that they will enact that change later this year; maybe it will be quick thanks to pressure from bad coverage from places like The Verge or maybe they will make a change to coincide with new regulations from the FDA.

You might be thinking “Why wouldn’t Facebook allow for CBD ads on its platform?” The short answer is that it is making so much money from selling ads that it isn’t going to be hurt by not allowing CBD ads on its platform. Furthermore, since they are under the regulatory microscope, they may be loathe to try anything that might even be the smallest bit out of line. Instead of risking the wrath of a renegade senator who has some personal issue with CBD and happens to also sit on a committee that has some power over Facebook, Facebook would rather wait back until the point when it is 100% legal (at least federally) before opening up the ad flood gates for CBD.

It’s a very conservative move but, again, the upside for Facebook at this time is rather limited while the downside, which would be increased scrutiny from politicians and regulators (especially those politicians and regulators who already have an axe to grind when it comes to Facebook, which is just about everyone these days) that could lead to some fairly dire consequences for Facebook.

The downside of this strategy is that because they had uneven enforcement of this “no-CBD ads” policy before, they have opened themselves up to litigation from (one so far) companies that had their accounts disabled for trying to promote CBD. Still, even if they have to pay out tens of millions of dollars to these companies whose accounts they disabled that would be better than having to worry about pissing of someone who might be the deciding vote as to whether or not Facebook should be broken up. And, to be 100% clear, I don’t think Facebook will end up losing much money in any litigation brought forth by a disgruntled company that had their Facebook ads account disabled. It’s better for Facebook to just sit back and wait for 100% clear rules when it comes to CBD.

What can CBD marketers do?

Amazon is an option. You can market and sell your products there. Savvy marketers will make sure to encourage their customers to leave good reviews on Amazon, which is vitally important for these companies since their Amazon page is likely the only way they will communicate with their customers before they buy.

YouTube (currently) allows videos about CBD. While it’s possible for you to create a popular YouTube channel that discusses all of the wonderful things that CBD can do for people, the more useful route would be to work with existing influencers on YouTube to promote your CBD brand. Influencers, for the uninitiated, are people or brands, which is basically the same thing nowadays, who have sway over their niche audience. For example, you can approach a YouTuber with 100,000 followers who gives makeup tips for adults suffering from acne (yes, it can get that niche) and see if you can get them to promote your products. You will probably need to pay those influencers who have a big enough reach but the rewards can be substantial.

An alternative to the YouTube marketing strategy would be to work directly with an influencer with a large enough audience to create a bespoke brand for them. That way, it will be their brand and you would be responsible for fulfillment and all of the other business activities.

Besides Amazon and YouTube, there are other options. Even though Facebook is banning people for buying ads about CBD on their platform, you could still post on its platform. Ditto for Instagram.

And there are also offline marketing strategies as well. End caps are those displays at the end of a grocery store aisle (trust us, they work). You can also pay for placement where people checkout. Another option would be to give talks at senior living centers about the benefits of your CBD products and take orders while you are there.

In other words, just because Facebook is lowering the boom on companies that are advertising CBD products that doesn’t mean there aren’t other, maybe even better, options for advertising CBD products out there. You just have to be a little creative and you will find success.

Kroger To Sell CBD Products Soon

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Another in a long line of traditional retailers, Kroger, will start selling CBD products within the coming weeks. To start, Kroger will not be selling CBD products that you can eat and they will only be selling product in Kentucky.

“‘We will not be selling ingestible at this time. We are offering our customers a highly-curated selection of topical products like lotions, oils, balms and creams that are infused with hemp-derived CBD,’ [Kroger] Louisville division’s spokeswoman Erin Grant said.”

Looking at this cynically (and maybe some of you reading this would substitute that word for “logically”), one could see this as a blatant marketing ploy by one of the largest retailers in the country. Kroger, this cynical person might reason, knows that there isn’t much to substantiate the efficacy of CBD-infused products but since there are no known side effects Kroger is trying to get in on the CBD bandwagon.

And, even though there is mounting evidence that more and more people are finding CBD products helpful for whatever ailment they are facing, that cynical person is at least partially correct. The worst case scenario for the CBD industry is that these retailers are seeing the rapid adoption of CBD products as nothing but a mania.

I think the more likely scenario is that these retailers are seeing the beginnings of a trend. While not certain, it looks like there are some health benefits to taking products infused with CBD and, over time, we may even find out that there are more substantial benefits to using CBD products than with simply helping get rid of acne or helping one calm down.

Looking at it this way, what retailers are doing is essentially buying an option to pursue this customer base. By taking these first, tentative steps into the CBD market, these retailers are communicating to their customers that they have heard what they want and these retailers are taking the CBD marketplace seriously. Starting out with oils, lotions, and ointments these retailers are making an effort to get in the CBD space and, with time, will be open to expanding their offerings.

Or retailers like Kroger could simply be playing follow the leader because they don’t want to get left out on any of the CBD fun.

Either way, I think the old adage about paying more attention to what someone does and not what they say is what we should be going by in this situation. Retailers are carrying CBD products because at the very least they think that the CBD market can become an important part of their business.

The only time to become worried is if retailers start taking CBD products off of their shelves. This would either happen because the laws and regulations turn against CBD products or because there just isn’t enough demand. I think that neither scenario is likely but, of the two, the least likely is the latter. People are already using CBD products in large numbers and, if anything, this marketplace will expand by up to 40 times what it is now by 2022. CBD is a hot market and we don’t think that will abate anytime soon.