How To Scale Your Edibles Business

How To Scale Your Edibles Business

 

In our prior post, we discussed how aspiring entrepreneurs looking to cash in on the green rush can start their own edibles company. In this post we’ll cover how ambitious edible manufacturers who have already laid the foundation of their business or are in the process of doing so can set themselves up for success in the burgeoning cannabis market in California and beyond. Smaller upstarts looking to go national would be wise to follow suit of leading brands who have benefitted by making the right moves early on. 

Several challenges remain, though, as an uneven regulatory framework poses substantial hurdles for companies looking to expand across state lines. Regardless, there is a light at the end of the tunnel for companies keeping some of the following best practices in mind.

Invest in capacity from the start

If you can, invest in infrastructure and sufficient space from the get go to avoid being constrained by capacity as you grow. Look for a food processing facility that allows you to implement manufacturing processes for production-style work. Ideally the facility should be easy to clean after use and have some features such as floor drains, wash stations, and fume hoods, and allows for safe food handling procedures. 

Without the ability to scale, your kitchen could be over-extended, forcing you to find new locations. Take the company Incredibles, which, according to MJBiz Magazine, produces 7,000 chocolate bars per day, along with dummies and concentrates. It’s doubled in size every year since its inception in Colorado in 2010 and now also manufactures in Nevada, California and Oregon. The team at Incredibles have had to plan for serious infrastructure and we're excited to see how they fare in the long run. 

Another option you have is to select a co-packing partner which already has the infrastructure in place and can help in producing your edibles. Be sure to select an efficient partner who isn't spread too thin and can provide you the support you need to meet market demand. You might even need to work with more than one, depending on your needs. 

Select ingredients you can consistently buy in bulk

Since most recipes find their start in a small batch, you may be tempted to select a given number of ingredients and not plan for buying materials in bulk. Any edibles manufacture operating at scale will need to be assured that minimum-sized orders are available as needed and can be properly stored for certain periods of time. Be sure to forge and nurture good relationships with suppliers and pay on time so that you get the best deals. 

Add new equipment and staff cautiously

While automating aspects of production is important, buying a bunch of machines prematurely may prevent you from having the flexibility you need to adapt to changing market needs. When deciding which machines to add, justify the investment in the equipment with an increase in efficiency first and foremost. The same philosophy applies to staffing. Production workers, comprised of growers and kitchen and packaging workers, are the most important type of staff to hire because they contribute directly to your bottom line. As a general rule of thumb, only increase your staff if you absolutely have to, and avoid making unnecessary administrative hires as their pay cannot be typically considered a tax write off. 

The quality that comes from small-batch manufacturing suffers with increased production. There are numerous accounts of consumers enjoying one batch of edibles and not another -- leaving them confused and unlikely to want to purchase that brand again. Maintaining consistent levels of THC, along with other product attributes like packaging, is imperative in delivering a good consumer experience.

The best way to do that is to remain in close touch with your retail customers and figure out how fast they are selling your product(s) so that you know how much to produce. Some companies hold production-sales meetings every few weeks and make sales forecasts that help the production department adjust its output. This could become challenging, however, if your retailers won’t share that information with you, but with the right software you can analyze order cycles and anticipate customer needs regardless of retailer feedback.

Taking your branding to the next level

We're seeing a progression of companies embrace change and make the transition from a homegrown aesthetic to one that appeals to a wide variety of customers. If your branding feels stale or stagnant, consider revitalizing it with help from professionals or agencies. Competition is becoming fierce by the day, and subpar labeling and branding could spell the difference between success and failure. Products that have attention-grabbing, aesthetically-appealing packaging will stand out on dispensary shelves and be more likely to be purchased. As we showed in our last article, there are several cannabis brands in California doing a great job of branding that you can take a look at for inspiration. 

Scaling your sales within each state and into other states

Quite a few brands have successfully distributed their product within their home state, but only a few have been able to navigate the complicated cannabis ecosystem to get their product distributed in multiple states. California is particularly large as well and has been equally hard to distribute across the entire state as it has been to go into new states. Some companies have created some protocols on national expansion and they are somewhat similar to scaling within your own state. 

Dixie has gone down the route of leveraging companies in each state that help them by handling manufacturing, distribution, packaging, and sales all in one. There are a few companies that do this in every state. They all are slightly different with some focusing on the manufacturing and production while partnering with a distributor in their state to handle the sales side of things. Although they general have the internal infrastructure or partnerships to take your brand and processes and bring them to whichever state you're looking into. Two example companies in California are Infusion Factory and Indus Holdings which work with various cannabis brands. The general process is you explain your brand, give them all of the necessary branding assets, explain your manufacturing process, find reliable suppliers in that state, and establish standard operating procedures to ensure that this company can bring your brand into this new state seamlessly. 

This can take a long time to establish this relationship, but it can have extremely high value returns. If  everything goes according to plan, this company can open up your company to an entirely new state for sales to come through. Dixie, as stated before, has done this beautifully and successfully brought their product to multiple states through these relationships. Word of warning, they have also shown the risk of this as they got burnt in one of their relationships causing an expensive buyout of the bad relationship. Make sure you have a strong lawyer and team prepared to put a lot of energy into this if you go down this route. 

Protect your intellectual property

It's important to note that it may be difficult to get intellectual property protection for your brand because cannabis is a controlled substance and the USPTO does not recognize substances listed in the Controlled Substance Act to be protected on a federal level. Furthermore, the state of California follows USPTO guidelines when it comes to IP protection for controlled substances, making it even more difficult for brands seeking protection afforded by the state under Common law. One way around this is to obtain registration for ancillary goods or services that do not violate the CSA.

For example, if you manufacture cannabis-infused chocolates AND you produce and sell a non-infused version of that chocolate, you may be able to secure a federal trademark registration that will cover your non-infused chocolates. The strategy here is to then assert a “likelihood of confusion” argument against any would-be infringers in order to prevent them from using your mark.

Before you can do any of this, you will want to do thorough research and / or hire a trademark attorney to do a prior art search to ensure that your brand or logo doesn't infringe other brands. Remember, a mark need not be the same as another mark in order to infringe that mark – the standard is “confusing similarity,” which is made up of several factors and is highly subjective. Be sure to seek the advice on an expert. For a full directory of licensed brands, check out the Marijuana Business License Directory which covers licenses in most states, asides from California as that information won't be available till after 2018.

If expanding across state lines, you will need to either license your brand or franchise it, depending on the level of control you're willing to exert. Manufacturers will typically go the license route whereas retailers may franchise. Each type of deal has varying legal requirements and operating under the mark of a license while really trying to regulate how the operation is setup could make it a franchise scenario and neglecting to manage that could result in fines and even revocation of business licenses. Please consult your attorney for further details on this topic. 

Lastly, be sure to get product liability insurance, offered by services such as Cannasure. Normal insurance policies won’t cover non-FDA-approved therapies, creating a huge business risk if something happens to your product during the manufacturing process. No business is going to be able to handle a major loss of products without serious financial implications, and insurance is something that needs to be approached as an integral part of doing business instead of just another expense to minimize. In order to be insured, you’ll have to ensure that your facilities are in a good working order and meet certain standards.

Engage fans and partners on social media and events

It's not a secret that all cannabis companies: delivery companies, retailers, producers, and distributors are actively publishing content on social media channels. The most popular channels include Instagram, Massroots and Snapchat. YouTube, Facebook and Pinterest can also be worth exploring depending on where your target audience is spending time. You will want to publish content consistently and in alignment with your brand voice. Be sure to respond to messages and comments and to work with other brands and publications to cross-promote content. There are also plenty of tools available to help you find content and schedule it ahead of time with the right tags. 

There are also a few cannabis specific advertising networks such as Adistry and Mantis Network that can help you get your cannabis advertised through various channels. Another creative marketing concept growing in popularity is recruiting brand ambassadors to evangelize your brand online through social media as well ass offline for in-store demo's, local events, and cannabis conferences. A group of college kids with some hustle can help grow your brand for relatively low effort, but make sure they reflect your brand's personality.

Use data to improve your operation

As you grow, you’ll have access to granular data that you can use to improve various facets of the business. Whether it's consumer feedback on your product from a dispensary tour or insight into which content is best resonating with your audience on Facebook, leverage both the qualitative and quantitative data available as you can to improve your business.

In addition, certain data will be submitted to government agencies yearly as part of remaining compliant starting in 2018. Seed to sale tracking will allow the government to manage certain situations. Say, for example, a batch of your edibles needs to be recalled. They will need to be able to instantly figure out which of your production batches was tainted, how they were shipped and where they were shipped to, in order to isolate the problem. 

The green rush is in full effect and businesses from all over are vying to get in on the action. We anticipate that there will be many new edibles and concentrates companies that will be launched this year and after 2018 we'll start to see companies start to slowly fall out due to their inability to scale or maintain brand quality, and we'll also see consolidation happening with market leaders in certain municipalities being acquired by bigger players. That's not to say that there isn't any place for smaller businesses operating successfully at local levels; you could do well serving a smaller amount of dispensaries than the bigger guys, but the risk of bigger guys undercutting the smaller guys will exist no matter what. Taking the time to properly address the various facets of your business, such as selecting the right software partner that scales with you, will pay dividends in the long run and put you on the winning side. 

If you'd like to learn more about distribution, drop us a line at hello@distru.com for a free consultation. Happy scaling!

- The Distru Team

 

How To Start an Edibles Business in California

How To Start an Edibles Business in California

 

Thinking of starting your own edibles company? From bakers to chefs who produce high caliber desserts to die hard entrepreneurs cultivating their own cannabis, there are plenty of opportunities for those looking to get in on the action. Before diving in and launching your own edibles business, however, it’s critical to do your due diligence and research the current and anticipated regulatory climate. Even though there now quite a few established brands, the industry is still young and there is plenty of room for prepared entrepreneurs to establish a household brand.

Understand the state's and local ordinances in play

The Medical Cannabis Regulation Safety Act (MCRSA) was signed in 2015 by Governor Jerry brown and is comprised of 3 separate bills written to license and regulate commercial medical cannabis cultivation, manufacturing, distribution, transportation, sales, and testing.

MCRSA is the defacto roadmap to the future of California’s marijuana industry that will not be enforced till 2018 and will require business owners to acquire local permits before qualifying for a state license. Some cities like Los Angeles, for example, do not offer local permits, so it is critical to check with the local government ordinances where you wish to operate before going any further. In addition, the AUMA or Prop 64, has passed which establishes 19 different license categories parallel to those in MCRSA, covering cultivation manufacturing, testing, retailing and distribution. Licenses for adult use facilities are distinct from those for medical facilities issued under MCRSA. 

It is important to note that cannabis is federally illegal and cannot cross state grounds. If you are in California, you will sell ONLY in California. The only way to move across states is to license or franchise your brand. Lastly, you may also be subject to federal raids although the state governments are working hard to minimize this. We’ll cover these topics further in future posts.

Find a good location to setup shop

After grasping the risks and regulations facing cannabis businesses, it is now time to find a location from which to operate. Keep in mind zoning laws which dictate the minimal distance you have to be from places such as schools. Prematurely selecting a location without being cognizant of day care or school locations can result in plenty of wasted funds, fines and / or jail time. Also, the location should be accessible to you and your personnel and have the right amenities so that your staff can work happily for long periods of time.

There is also a new legislative development in California that has relaxed rulings on asset forfeiture that has plagued cannabis operators who were caught growing or manufacturing illicitly, but that doesn’t mean you should take being legally compliant any less seriously.

Consider your expenditure

Starting an edibles company isn’t cheap, but the good news is that it is LESS expensive than opening a dispensary. You will have to consider an assortment of fixed and on-going costs including:

  • Infrastructure / kitchen equipment

  • Material sourcing

  • Staff

  • Brand development

  • Marketing

  • Rent / property

  • Testing

  • Packaging

  • Software

Thinking of getting a business loan? Guess again. Most banks won’t touch your business due to the risks involved.  However, there are investors out there looking to get into the game. If you happen to connect with an investor, go the extra mile to ensure them that you have carefully planned for this venture and build credibility however you can. There are also accelerators out there that offer new companies access to office space, legal help, mentors, investors and startup know-how in exchange for a small amount of equity. Please note that accelerators are competitive to get into and run for 2-4 months or longer (each one is different). Your best bet is to talk to existing companies in accelerators and seek advice on how to get in.

Don’t forget to plan for the staff you’ll need for everything from social media marketing to cooking to packaging. Create a spreadsheet and write some associated costs for what you think it will take to get you growing and you can add to it over time.

Find a source for cannabis

One of the best ways to find a consistent source for cannabis is to go to cannabis-specific events and conferences and meet cultivators and manufacturers. Be sure to look for someone reputable who will provide you quality flower as you need it. The reality is, however, that most companies will use whatever they can get their hands on: trim, flower, shake etc. You can also search for these on wholesale marketplaces and buy in bulk.

Whatever you do, make sure you’re getting a good deal and not being ripped off. With prices expected to plummet during supply gluts, you can figure out optimal days to buy to make sure you’re getting the most bang for the buck.

Setup your infrastructure

Edibles production requires having a kitchen setup in a certain way and stocking up with enough ingredients depending on whether you want to create butter, chocolates, beverages or a plethora of other types. You will need to consider if your products require refrigeration or not and expiration dates, or if you bake then you may need a commercial kitchen.

Alternatively, you can work with co-packing companies who already have an infrastructure setup, can create edibles for you, and package it up with your brand!

Develop your brand identity

Companies have started spending large on packaging resembling high-end products you find in your typical stores, using their labels to subvert the stigma of hippiedom and cross the chasm into a new era where older and professionally established users are the target market.

Although logos do not warrant such scrutiny, one must be very mindful of packaging laws. Due to the tricky nature of consuming cannabis-infused cookies, candies and other delectable treats, consumers are wary of what they ingest. In Colorado, for example, childproof and resealable packaging is very important. Although laws for California will develop, it is better to play it safe and package in the right doings. Check out the following brands who are doing their packaging design right: Kiva Confections, Auntie Dolores, Big Pete's Treats, Defonce Chocolatier.

In addition to packaging, you’ll want to secure a website that creates transparency for your brand and product line(s). You can easily create your own site using Squarespace or Wordpress (or a number of other tools out there), or you can enlist a designer from a freelance site to help you.

Before you commit to your brand, you may be interested in validating your work through programs such as Gateway Radar that brings consumers in a round table setting to provide qualitative feedback. There are also distributors like Calyx who go on sales tours at dispensaries and gather invaluable feedbacks for brands. 

Setup distribution channels

Most brands will start by visiting dispensaries and convincing them to stock their products to get some initial feedback. Once you confirm that your product will garner demand and you have your production established, the next challenge to solve is distribution: how to get your product out there where consumers can start buying. There are a few factors to consider when planning distribution:

  • Identify what type of dispensaries and delivery groups you want your product stocked. Not all dispensary and delivery groups are the same and they often have different customer bases. Identify your brand positioning and create a list of your ideal consumers.
  • Find distributors who can expand your reach. There are a few aspects to finding the right distributor you need to consider such as how much supply they need from you, how they will store and ship your product, which areas they reach and don't reach, how they will represent your brand, what other brands they carry, what their cut is and so on. 

Once you establish some dispensary sales yourselves and/or work with some distributors, you will want to make sure that your product is delivered consistently and it's being presented to consumers properly. This comes down to you doing some legwork and going into the dispensaries with your product stocked to see what the end result looks like to your consumer. Some distributors do mystery shopping for you like House of Nice Dreams, but it's always good to do your own ground work.

If you'd like to learn more about distribution, drop us a line at hello@distru.com for a free consultation.

Prepare to hold cash

Banking for cannabis companies is complex. No federally insured bank will accept cash for marijuana businesses, but there are some pilot programs happening under the FinCEN guidelines. It will take some time for regulations to mature so for now be careful in how you plan to keep your money. 

Select software to manage your operation

You will need software to automate and manage critical aspects to your business such as:

  • Customer Relationship Management

  • Inventory Management

  • Order Management

  • Task Management

  • Accounting and Payroll

Whatever tools you select will need to be connected together in someway in order to automate your processes or you may end up spending a lot of time with double data entry and human errors. Alternatively you can use software that enables you to manage your operation from one tool like Distru.

Advertising and beyond

You may need to augment your distribution efforts and build demand directly with consumers by actively maintaining your social media profiles on Instagram and Massroots as well as exploring advertising options with relevant publications. We highly recommend checking out marketing services that aggregate cannabis advertising opportunities for you such as Adistry and Mantis Ad

Good Luck!

- The Distru Team