CBD Up Close

Cutting through the CBD hype

Travis Lindsay

Rob Gronkwoski – CBD Spokesman – Why aren’t there more professional athletes supporting CBD?

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This makes sense.

Gronkowski suffered from multiple, and some of them very serious, injuries during his career and one of the primary selling points for CBD is that it helps to relieve pain.

However, I think the more interesting thing about this is that Gronkowski waited until after he had retired to become a spokesman for a CBD company. Even though CBD is in a seemingly ever-changing grey area legally, it’s a product that seems to have wide ranging support from many parts of the economy.

For Gronkowski, and I would suspect most other professional athletes in a major sport, I have to think that becoming a spokesperson for a CBD brand is frowned upon, if not against contract (there are some current professional athletes who are open about their CBD use but most are retired). Even if CBD were completely legal I think it will take some time for there to be a popular professional athlete who will be a spokesperson for a CBD brand.

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.

Ex-Kellogg President Says CBD Industry to grow to 20+ Billion Dollars in Five Years

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We have talked about this in the past, the CBD industry is predicted to have amazing growth over the next few years, possibly to more than $20 billion in a few years. Now we have the ex-president of Kellogg North America, Paul Norman, saying the same thing: “This market is going to grow four or five fold to 20 plus billion dollars in consumer value over the next five years,” Norman tells Yahoo Finance. “I believe, down the road, CBD will be widely available in all kinds of consumer products.”

Mr. Norman is now the CEO of HeavenlyRx, which is a CBD company that is acquiring and investing in other companies in the CBD industry. According to a recent press release:

“HeavenlyRx’s focus is on hemp cultivation, processing and the manufacturing of a diverse range of traditional CBD products including oils, tinctures, balms, and vape-ready products. Heavenly Rx will also own and operate its own retail locations along with health & wellness related studios where it will generate a repetitive captive audience with a desire for Heavenly Rx’s products to be part of its customers’ daily routine. It is expected that Heavenly Rx’s portfolio will include several proprietary brands across numerous consumer product group verticals such as cosmetics and beauty products, bath and body products, and infused foods.”

Best case scenario, Mr. Norman would want to grow HeavenlyRx into the Kellogg’s of the CBD industry. It’s an interesting strategy, it makes sense on many levels but I have to wonder how many great deals are out there in the CBD space right now. On the one hand, it’s a nascent industry so there are many small brands out there that have a lot of potential and can probably be acquired at a seemingly low price. But how many of these companies will survive for the long haul? How reasonable are the prices considering the fact that just about everyone in the space, including Mr. Norman, think that the industry will grow dramatically over the next few years?

There will surely be brands that are mega winners in this space but there will also be losers. HeavenlyRx is making a portfolio bet here that their winners will more than make up for the losers that they acquire. It’s analogous to the bets that venture capitalists make: Invest in dozens or hundreds of startups with the hopes that the winners will have such outsized returns that it will give their portfolios a high return on their investment. Again, my only concern here would be that there may not be enough “deals” out there for this kind of portfolio bet (a year or two ago would have had better deals available).

Joe Rogan “CBD is One of the Best Things I’ve Ever Tried for Anxiety” – CBD Trust Marketing

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It’s videos like this that make it clear CBD companies should work to engender trust marketing all day long, every day of the year. It’s anecdotal evidence, which isn’t as good as statistical evidence, most of the time anyways, but it’s testimonials like this that will help get more people into CBD.

To the video. Joe Rogan is telling his guest, Maynard James Keenan, about how he has benefited from using CBD to help with his anxiety. In the video, he holds up a bottle of pills, shakes it, and first says that those pills can fuck you up because, if you take too much, it can make you paranoid. Not off to a good start, right? Wrong. Leading with the negatives is a great way to engender trust because if you’re willing to lead with what’s wrong with a product that signals to people that you are honest.

Then Joe goes into how CBD, and not just the pills in the bottle that he shook on camera, but also CBD oil, has helped him immensely with his anxiety. CBD is a “vacation saver” for Joe.

After rewatching the video perhaps the most powerful part of the discussion was when they talked about the negative effects ibuprofen can have on a body. Joe relates the story of a person he knows who is a runner who took ibuprofen to help with inflammation only to have his problems with inflammation increase. Turns out that it was the ibuprofen that was destroying his gut biome and causing his problems to worsen.

Joe also went on to talk about how CBD creams are a great way to help with aches and pains.

The key takeaway from this is that in a world where trust is provisional and the CBD industry is akin to a mellow Wild West with a short history of clinical research and a proliferation of fantastic claims abounding, it’s the companies that opt for a more genuine dialogue with their customers by acknowledging the truth, warts and all, upfront that will win the day. This isn’t to say be a dope about it, or do it in a weak way, that’s not Joe’s public persona at all, but be forthright with how you talk with customers. Customers who trust you are more likely to stay customers.

CBD Beverage Startup Sweet Reason – A Lesson In Branding

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Sweet Reason is a CBD beverage startup that recently closed a $2.5MM seed round to fund its early stage growth. According to an article on TechCrunch, Sweet Reason has had to deal with some growth pains navigating the evolving regulatory environment. For starters, they thought that they could launch in cannabis-friendly Canada but that was a nonstarter thanks to changing laws. From there, they changed their launch strategy to focus on America.

Starting sales in New York they have expanded out to other states through online sales and are doing well enough to have raised a round from some heavy hitters. They are doing very well and there are important lessons you can learn from their experience.

CBD Consumer Product Launch Expenses

Hilary McCain, the Chief Executive and founder of Sweet Reason, is a pro in the food industry having been a consultant at Boston Consulting Group. What she and other veterans of that industry know is that it costs a decent amount of money to launch a consumer product. Hilary started Sweet Reason with a couple hundred thousand dollars of her own money and that money went towards “market research, brand development and the creation of her CBD-infused concoctions.”

That’s what it costs for someone who knows what they are doing so, if you’re thinking that you want to start a consumer product CBD company, keep that in mind. It will cost more than you think.

CBD Branding – Sweet Reason

There are many different directions to take it and Sweet Reason looks like their branding is directed towards a younger demographic. If you look at their site, or the screen grab below, Sweet Reason is focusing its brand on natural products. Their sparkling water comes in glass bottles, has clean and clear labeling, and they don’t overdo it. It’s straightforward packaging that communicates value.

The color palette throughout their website and their social media mostly centers around pastels and women who are living happy, healthy lives. Their Instagram feed is a combination of black and white portraits of women enjoying life, inspirational quotes, and every post is artistically done.

Their Instagram bio speaks to how they are positioning their brand not as a CBD-infused sparking water company but as a part of a great life: “CBD-infused sparkling water made to help you slow down, relax, and pursue a life well-lived.”

Price is also a way to communicate your brand and they have priced their products in a way that positions them as a upper scale company. There is definitely psychology in play here because price certainly communicates quality for most people. Maybe purchasing this product can also serve as a status symbol for some people.

Their bottles are made of glass and are on the shorter size. Looking at the Instagram post below, even though the Sweet Reason bottles are not in an optimal location, well below a person’s eye line, their bottles still stand out. The bottles with the large labels are probably cheaper to produce but they are communicating the message that they’re hiding something. The aluminum cans communicate a lower value. Sweet Reason’s packaging, on the other hand, communicate freshness and quality.

CBD Consumer Products Lessons Learned

Launching consumer products is an expensive endeavor. You need to clearly identify what demographic you are going to target and then lean into that. Sweet Reason has seemingly determined that their demographic is younger, upwardly mobile, and mostly women. At least their branding seems to indicate that.

When launching a consumer product you will be faced with many choices. Do you want to go up market or down market? How will you price your products? How many products will you offer? How will you distribute your products? How will you market your products? How will you package your products? And the list goes on.

The best takeaway from this is that you need to clearly answer one straightforward question: Why will people purchase my products?

Sweet Reason started out like most other companies, they wanted to make money and that is a very good reason to start a business; if you’re a devotee of Milton Freedman then that is the primary reason to start a business. But you have to take it a step further and figure out why people are going to care enough about your products to part with their hard earned money to purchase your product.

For Sweet Reason, they determined that customers will purchase their products because Sweet Reason’s products accentuate their customers’ lifestyles. There are already other CBD water options in the marketplace and there will be only more options as time goes on. Sweet Reason has identified a niche and they are leaning into it. You should do the same.