CBD Up Close

Cutting through the CBD hype

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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.

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).

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.

CBD May Be Solution to Drug Resistant Infections

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This story is from WebMD and, if the best case scenario turns out to be true, it would be pretty great. The basic gist of the article is that CBD may prove useful in fights against drug resistant infections, also known as “superbugs”.

And there is research being done on this. It’s still very early days for this research but, according to Mark Blaskovich PhD, one of the researchers, “The first thing we looked at is CBD’s ability to kill bacteria. In every case, CBD had a very similar potency to that of common antibiotics.”

How CBD Industry Should Treat Early Stage Research

Tout it but don’t make it a central piece of marketing. The 100% no bullshit truth is that, with one key exception, we just don’t know what CBD can do. It certainly looks like it can help with anxiety and normal aches and pains but, beyond that, we just don’t know.

So, by all means, link to these studies, talk about them, but make sure that you aren’t making any claims off of them just yet.

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.)