5 things new entrants should get right before starting their journey in Cannabis Drinks.
The theme for the cannabis drinks expo for 2022 is advancing the category. The enthusiasm for cannabis beverages remains constant, but progress (and sales) for the most part remain stagnant.
At the 2022 Cannabis Drinks Expo, attendees will be able to collaborate and learn from those that have endured. Lessons will be learned from the war stories, and cooperation will lead to some mutually beneficial breakthroughs.
For those yet to enter this exciting category, a lesson on what is true today and the resources it will take to go to market will fast-track you towards ceiling-breaking success.
Here are 5 things new entrants from traditional CPG should be aware of before starting their journey.
Map out your addressable market.
When I typically engage with a new client, they think of their addressable market from a consumer perspective. While this practice is essential, in cannabis your access to consumers is severely throttled by the limited number of retailers.
The first question to ask is what state do you want to enter? California has over 1,000 licensed retailers, and Oklahoma has double that. Massachusetts has around 130. These numbers alone aren’t apples-to-apples comparisons.
The Oklahoma market is a bit saturated, and the result is a single door serves fewer people with a smaller average ticket. The consequence of driving by 5-10 dispensaries on your commute to work. It’s been a decade since I drove through Oklahoma, but if a dispensary shared a parking lot with a gas station I easily could see myself walking over and getting a cold 3mg drink.
Image: Dispensary cooler
Within Massachusetts, we have Boston with a dense college population of health-minded individuals and many foot commuters. For a low-ticket item like a beverage, a foot commuter is more likely to take a detour into a shop than someone in a car who would need to hunt down parking. A dispensary in the suburbs or the industrial part of town is in a less convenient location and typically competes on selection and price. Massachusetts is also neighboring many non-recreational states with high-income earners. Consumers for NY looking for legal cannabis make the journey down to stock up.
California sounds like an ideal market to launch cannabev in. It’s the largest today, the market is more established, and the population is cannabis-friendly. Your avatar is “Yoga Sally” a 26-year-old vegan who is looking for an all-natural tea to drink to get into the flow before she exercises or mediates. She does smoke cannabis on the rare occasion that life feels a bit overwhelming. When she does though, she is ordering her favorite flower via a licensed delivery service. She is taking a hit from her friend that always buys ounces in the thousands of unlicensed shops. Expecting her to make a special trip to a dispensary and take a chance on a $9 beverage that’s not visibly merchandised is unrealistic.
California retailers are also notorious for mismanaging cash flow. Anecdotally, depending on who you ask 200-300 don’t pay their vendors as promised yet still ask for credit terms. You might not even want to be in all 1,000 stores.
California’s large geography and its ability to set cultural trends for the entire globe still make it an interesting market to consider. The large geography means even with limited resources you can launch regionally, prove your concept, and then seek additional resources with sales validation to support your ask. We also have the most contract manufacturers willing to help with your beverage.
In MSO-dominated states, the products on the shelf are typically vertical. The best strategy would be a joint venture with an MSO that is looking to carry drinks. From the interest in my inbox, I can tell you they all are.
How will you serve that market? (Inhouse sales vs 3rd party).
The toughest part about launching any CPG brand in cannabis is still getting your product sold. Ideally, an entrepreneur already has experience selling and operating in this space. If not, you should plan on landing your first ten accounts yourself to see exactly how hard it is to get retailers' attention in this category.
If you are an entrepreneur with no experience in cannabis but are skilled at sales, your persistence will pay off with time. If you are unwilling to get the 10 accounts yourself, you better find a person on your team that can. Recruiting is a sale after all, and if you flat out can’t sell you better have a lot of capital behind you to overpay someone that can.
There are some 3rd party sales agencies that can support you with their existing retail relationships. Note the word support, you can’t expect them to carry the sales burden on their own. Cannabis distribution and retail are still in the stone age. Data is lacking and buying patterns are influenced by cash flow rather than revenue optimization. Retailers are struggling to differentiate and ask for discounted and promotional items to keep their clients happy. It’s the proverbial race to the bottom, and most sales are just made on relationships and price rather than consumer emotional needs and facts.
A 3rd party sales agency is an amplification of your sales voice. They won’t sell your product as you can.
When building out your budget for your sales team, take the first step and map out your addressable retail market. In California, a good rule of thumb is a single sales representative can manage up to 40 accounts. They will expect a base salary between $60-$80k depending on their experience, in addition to commission and transportation (company car or mileage reimbursement).
Getting a product on the shelf isn’t the end of your sale.
The great thing about selling a beverage is everyone drinks liquid, and everyone can potentially add a case of your drink to their budget. They put it in the fridge where anytime the urge hits a cold, refreshing beverage can quench their thirst and if the right compounds are in it, put them in a desired state of mind.
This is why you see floor stacks of alcoholic beverages in your grocery store. When I worked at Pepsi the motto was “stack them high and watch them fly!” One of the most memorable experiences as a new employee was working at a large volume Wal-Mart when we had 24-pack cans on sale for $5 on the first of the month when food stamps were replenished. The store manager authorized me to wheel out a pallet of the cans on the floor with a homemade sign. I had to drop a fresh pallet on the hour.
This just doesn’t exist in dispensaries today. The stores are emphasizing aesthetics to draw the right crowd of big spenders, or they’re featuring the potent concentrates and flowers that draw in the cannabis enthusiasts. A low-dose beverage that is meant to replace alcohol struggles to fit into either theme.
We do see fridges today, and competition is fierce. The best way to get your drink in this cold space is to supply the cooler. If the store refuses or already has enough, the brands we see in the store have some combination of:
- Extensive free products granted to the store
- Frequent sampling of uninfused virgin product
- High potency, low price (which is arguably liquid THC and not a “beverage”)
If you are low dose, that trade spend and promotional product support quickly adds up.
Your COGS will be significantly higher than you expect.
Your co-packer for traditional beverages cannot legally touch cannabis. In a lot of markets, a licensed beverage co-packer doesn’t exist. Scrappy brands in new recreational states are investing in their own manufacturing equipment and signing joint ventures with licensed contractors.
California has the most options for co-packers. Depending on your volume, sterilization needs, and packaging, you will get a quote anywhere from $0.35-$1.25 per unit on the labor. The licenses and taxes add to the cost, in addition to the low volume we see from the category.
The reason you see mostly standard packaging in the category today is to keep MOQS reasonable. Typical production runs for a startup brand are under 5,000 units per SKU. 12oz cans are typically sold by truckload (over 200,000 units). You will need to either stock up, co-buy, or pay significantly more on a per-unit basis.
Lowing COGS will allow brands to lower the retail price which would increase sales volume. Which comes first? An optimized supply chain to support high volume or high volume that is able to support an optimized supply chain? This is a topic we’ll explore on my panel during the Cannabis Drinks Expo - SF.
Image: Paulo Lacerda Sobral, CannaBev Fractional Executive, and Advisor
What other channels can you penetrate?
Brick and mortar dispensaries are losing market share to delivery services in California. Covid has changed consumer buying behavior. I’m still a bit puzzled watching the latest uber commercials. Apparently, it’s normal to pay a surcharge to have your deodorant delivered so that you don’t have to put on pants. More and more, people are researching products, hunting for coupons, and buying strictly online.
The legislation in California reads that a cannabis delivery vehicle can’t leave its depot with more than $3,000 worth of product at a time. Thanks to lobbying by companies like Eaze, that product can be dynamically dispatched as orders come in. This is a tremendous win for operational efficiency. If a driver is making an order 30 miles from headquarters, she doesn’t need to return to fulfill the new order that just came in, assuming that product was stocked.
More than one operator has told me it’s a challenge due to the size and weight of the beverage. Good luck getting a 65-year-old woman delivering a 24-pack of drinks up to a 10-story apartment in San Francisco. Some drivers are instructed to not step out of the car. Trying rotating to your back seat to pick up an order of drinks and tell me how your shoulder feels. Pre-rolls are the same cost as most beverages yet a fraction of the size and weight, they are a lot more fun to sell and deliver.
As a result, delivery operators need to optimize the initial car load out to maximize sales. When a canna-curious consumer logs on to an existing delivery service platform they’re greeted with endless options for flowers, concentrates, and gummies. This potentially is off-putting depending on their views on the plant, but it’s undoubtedly not an easy-to-navigate experience.
The consumer might get lucky and see a low-dose beverage or two. If there isn’t a driver with the product within them in a certain radius, that product isn’t even shoppable for the consumer. Even if that product could be sitting in the depo.
The canna-curious consumer is likely to give up and go back to their favorite margarita in a can at 7-11 a block away. The best approach to getting traction at delivery has been discounting and promotions. You can get very creative and see which restaurants, gyms, comedy clubs, nightclubs, or bars will allow a consumer to order inside, get products delivered, and consume outdoors (or once they get home). This method is untested and will take some legal advice based on the municipality.
When building any go-to-market strategy and sales goals you must pick one of two approaches:
Top-down – what are your goals and what do you need to take from there? Remember the first point, determine your addressable market in terms of retail doors. Interview operators in that market and determine how many units you’ll sell per month. You’ll be able to figure out the rest from there.
Bottoms up approach - see what capital you have and which market/region makes the most sense for you. This will take more initial planning, and you’ll definitely want to measure twice and cut once.
I’m in cannabis beverages for the future when we will have more access to the consumers who are looking for these products. While it’s hard to access them today, with proper planning and some creativity you can launch your product and give your brand staying power to be a part of the solution.
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The Author (Header Image): Paulo Lacerda Sobral, CannaBev Fractional Executive, and Advisor