Tag Archives: tier

January 18, 2023

Data: The Key to Success in Today’s Cannabis Market

By Rick Maturo

As the cannabis industry continues to evolve, recent market challenges have created an environment that is more difficult for industry leaders to navigate. To find success in today’s marketplace, company leaders need to adopt a robust, data-driven approach to combat the influx of rising brands, emerging markets and pricing challenges, among other obstacles. By leveraging data, cannabis brands and companies can better make well-informed decisions to refine their business strategies and drive growth.

The Evolution of the U.S. Cannabis Market

The cannabis industry maintains its ranking as one of the fastest growing industries in the U.S. as the legalization of adult-use and medical cannabis continues to expand. When California first legalized medical cannabis in the 1990s, a lack of regulations in the market created space for new cultivation businesses and dispensaries to form. These early cannabis players leveraged capital to expand and grow, developing a business model that has been replicated many times over the years in markets like Washington, Michigan and Arizona.

“Keystone pricing is a common strategy in today’s cannabis retail market, and manufacturers would benefit from reevaluating how wholesale products are priced to determine the ultimate impact on the bottom line to maximize profits.”Some of the strongest cannabis brands today were formed during this time. Today, the U.S. cannabis landscape looks vastly different, and strict government regulations and stagnant federal policies make it more difficult to find success. Brands that are surviving and thriving in today’s landscape have invested heavily in data operations.

Investing in Data Operations

While data wasn’t essential for cannabis operations in the past, today, it can mean the difference between success and failure for a company. Cultivators, processors and dispensaries that analyze data have a broader perspective that allows them to pivot quickly and stay relevant.

Data-driven decision making is critical for cannabis companies looking to meet and exceed revenue goals at every level. For cultivators, data can help create an optimal environment for growth. Manufacturers can utilize data to improve environmental conditions, reduce waste, cost and more. By leveraging data, retailers can benefit significantly from learning precisely which products should have a place on their shelves.

Business leaders in the emerging cannabis industry benefit from embracing the infrastructure and business practices that are already standard practice in other industries. Many top-performing cannabis companies today are structured similarly to other CPG organizations, and those who employ these tried-and-true strategies will be primed to win. One successful approach that many cannabis companies are adopting is a three-tiered system for manufacturing and selling products similar to the one employed in the beverage alcohol industry, providing economic, regulatory and commercial benefits for all.

Unlocking Efficiency with Pricing

Pricing challenges have plagued the cannabis industry for the past 18 months. While an inflationary environment has caused the prices of products in many sectors to rise, cannabis has been largely unaffected. Yet, because cannabis is not yet legal at a federal level, markets have become segmented, and prices are highly dependent upon demand factors in each state. This unique dynamic, combined with increased competition, has forced many producers to accept lower profit margins rather than pass on costs to consumers.

“Outside of point-of-sale and distribution data, consumer insight panels are also important for gaining valuable information about what consumers truly want and need.”These challenging market conditions have made it critical for companies to drive more efficient operations. By implementing data-driven technology, cannabis leaders can operate more precisely to minimize costs and produce high-quality products. Keystone pricing is a common strategy in today’s cannabis retail market, and manufacturers would benefit from reevaluating how wholesale products are priced to determine the ultimate impact on the bottom line to maximize profits.

Leveraging Data for Growth and Innovation

For retailers, running a successful cannabis operation with sustained growth is nearly impossible without leveraging in-depth industry data and analytics. Consumer data offers key insights to guide in-store activations, including promotions and discounting, to boost sales for retailers. By utilizing data, including data from loyalty programs, retailers can optimize their product mix based on what consumers are actually buying, and improve scaling and segmenting. From analyzing a store’s traffic to monitoring product, brand and category performance, data is indispensable when it comes to elevating business performance.

Data is also essential for innovation planning, pipeline building and analyzing location-specific variances. Seasonal trends influencing cannabis products often depend on various geographic and socioeconomic variables. While in the past large retail chains often ran the same shelf assortments at each location, utilizing data allows retailers to account for variances that make a significant impact based on location and consumer set.

While some cannabis industry leaders are accustomed to making business decisions based on their gut instinct, data enables them to quantify predictive levels of success and plan for what sales will look like once products hit shelves. Outside of point-of-sale and distribution data, consumer insight panels are also important for gaining valuable information about what consumers truly want and need. As the cannabis industry continues to expand quickly, an increasing demand for products will encourage innovation that will be powered by data-driven intelligence for years to come.

September 5, 2022

Cannabis Beverage Distribution: A Q&A with Jason Vegotsky, CEO of Petalfast

By Aaron Green

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The cannabis beverage market is expected to reach $2 Billion by 2026 and is growing at a rapid pace. In Canada, the market share of infused beverages grew nearly 850% since 2020, according to a recent Headset report, the trend is expected to follow in the States. Some traditional beverage companies are hesitant to jump in due to the niche branding and supply chain models needed to capture significant market share. Other adult beverage companies such as Vita Coco and Pabst are dipping their toes into the cannabis beverage market to capture early market opportunities.

Sales and marketing agencies like Petalfast, with a core team stemming from the natural foods and beverage industries, have already started cracking the code for cannabis brands by implementing systems straight out of those industry’s playbooks. This includes disrupting the CA market by becoming the first to implement a traditional three-tier distribution model.

We caught up with Jason Vegotsky, CEO of Petalfast to learn more about the cannabis beverage distribution market. Prior to Petalfast, Jason was Chief Revenue Officer at KushCo Holdings (now Greenlane Holdings), a role he took on after selling his butane supply company to KushCo.

Aaron Green: How did you get involved in the cannabis industry?

Jason Vegotsky: I began my career in wine and spirits distribution, but I always knew I wanted to work for myself. My first foray into launching a business, raising capital and brand building was through my beef jerky company, Lawless Jerky, which I built and sold after five years. Drawing on my food and beverage experience, I quickly entered and understood the cannabis market. I launched a company called Summit Innovations that sold butane to producers making oil. I eventually sold Summit to KushCo Holdings, Inc. (now known as Greenlane Holdings, Inc.) and became their President and Chief Revenue Officer. Through that experience, I began to notice gaps in the cannabis distribution model. Petalfast was built to fill that gap, providing clients with exceptional go-to-market strategies, leading to increased revenue and customer loyalty.

Green: How does experience in natural foods and traditional beverages translate to the cannabis industry?

Vegotsky: The route-to-market strategy is similar to that of cannabis, and the industry can benefit from the knowledge and experiences of those who work in natural foods and beverages. The extensive regulatory history and long-standing distribution models of these industries can provide a framework that those in the cannabis industry can capitalize on.

Green: What is the current distribution model for the majority of cannabis beverage companies today?

Vegotsky: Cannabis beverage companies face significant regulatory hurdles regarding distribution. Transportation restrictions, state-by-state differences in THC serving sizes and packaging requirements, retail display and storage limitations, and consumer adoption are just a few examples of what cannabis beverage brands run into when looking to enter, compete or scale in a given market.

At Petalfast, we offer a tiered distribution model, and our clients get phenomenal distribution through our logistics partner, Nabis. Products are circulated to all of California’s dispensaries and delivery services, allowing brands to focus on what matters most: creating the highest quality cannabis products on the market.

Green: What is a three-tier distribution model? Why do you think the cannabis beverage market is ripe for this model?

Vegotsky: The three-tier distribution model is commonly deployed by alcohol and other traditional food and beverage companies as it provides each tier to scale their operations and focus on their specific services. The three tiers include the brand, the wholesaler (sales + distribution), and the retailer in this distribution model. Because cash flow is such a significant challenge in the cannabis industry, adding an extra tier by separating your distribution and sales is advantageous to brands as it decreases overhead and allows brands to have the ability to scale.

Green: What are the opportunities for smaller brands looking to carve out a niche?

Vegotsky: One of the benefits of working in an emerging market is the opportunity to get in on the ground floor, learn as much as possible about the industry and find where gaps exist. Brand building in this space requires a deep understanding of the consumer and the overall culture — something that most brands are still trying to crack. If a smaller brand can effectively target a base within a distinct product category, it can be very effective in scaling within its niche.

Green: With big players from adult beverages dipping their toes in the cannabis beverage space, is consolidation inevitable?

Vegotsky: At a certain level, yes. Well-established companies will seek out acquisitions of smaller, successful companies, especially ones that are capital constrained, but buyers need to be aware that capital alone will not be enough. The culture of cannabis is very different from alcohol or other adjacent beverage categories, so the success of these big players in adult beverages will be linked to their ability to locate and understand the consumer and implement branding strategies accordingly. Adult beverage companies entering the cannabis market must also realize that the flow of product to retailers is not the same as in alcohol, so they will need to adjust accordingly. The cannabis-infused beverage market is expected to reach $2 billion by 2026, so alcohol companies looking to join this movement should start exploring their options now.

Green: What trends are you following in cannabis beverages? What does the future of cannabis beverages look like?

Vegotsky: Canna-tourism has grown to a $17 billion industry. With the rise in cannabis-infused beverages, we’re seeing an increase in creative consumption offerings, from tastings and food and beverage pairings to dispensary tours and bud-and-breakfasts.

Cannabis beverages are attractive to newcomers as they allow for easier control of the effects. Businesses that provide an experience similar to that of a wine or brewery tour can capitalize on new consumers looking to explore the benefits of cannabis in a controlled environment.

The modern consumer is also more health conscious, and with the increased availability of legal cannabis, many are replacing alcoholic beverages with the plant. There has been a reported decrease in alcohol consumption since the 1980s, and many now believe cannabis is safer than alcohol. This belief is especially prevalent among younger generations, leading to more users incorporating cannabis-infused beverages into their daily lives. How we socialize or unwind at the end of the day will start to look different, and brands will become market leaders by speaking to the varied needs of consumers.

Green: How does the industry get there?

Vegotsky: For one, federal decriminalization and removing cannabis as a Schedule I drug on the controlled substances list would help. Cannabis companies don’t have access to the traditional marketing playbook to promote their brands due to TV advertising and social media restrictions. To build brand awareness, businesses should focus efforts on the retail level. Engaging with consumers in-store allows brands to grab their attention and drive faster sales until other avenues open up. At Petalfast, we decided to invest in field and trade marketing to bring brands to life at the retail level. We do this better than anybody else, and we do it at scale.

July 29, 2021

Soapbox

Can Cannabis Avoid Alcohol’s 3-Tier Distribution System?

By Rick Kiley

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As an experiential marketer that works with a lot of vice-oriented brands, I’ve always been fascinated by the story of the rise of spirits in the US – a history marked by ingenuity in the face of heavy restrictions, clashing social norms, crime and political ideals. Since then, those same qualities have emerged in the story of cannabis and how, against all odds, it has recently begun to push its way into the mainstream. But on the path to legalization, cannabis can also learn a lot from the spirits industry about what not to do.

For example, when laws governing the spirits industry were written in the post-Prohibition 1930s, the federal government wanted to create an equitable landscape. So, they created a 3-tier system – manufacturers or importers must sell to wholesalers, wholesalers must then sell to retailers and retailers sell to us. They figured that keeping manufacturing interests separate from wholesale and retail interests would keep any large company from owning an entire supply chain, muscling out smaller competitors.

In theory, it’s not a bad idea. Imagine the consequences of massive companies like Diageo or AB InBev using their money to pay bars and liquor stores to only stock their brands and not competitors. Add on the Tied House Laws, which basically says an entity in one of the three categories cannot have an ownership stake in any of the others, and you get a seemingly even-handed marketplace.

Tied House Laws theoretically limit one entity from monopolizing a supply chain

In truth, it makes it almost impossible to be disruptive or for new brands to break through. Other industries have innovated by cutting out the middleman and selling direct-to-consumer – something that simply cannot happen in alcohol (minus the wineries and distilleries that can sell direct out of their tasting rooms). Also, now distributors are so consolidated that there are only one or two big distribution companies in each state. So, as a company trying to bring a new product to market, you have to get into one of these highly selective and competitive distributors if you are going to be successful – a challenging ask for a small, independent brand.

Protection racket

Now, imagine that same challenge coming to the cannabis space. With legalization around the corner, the adult use (as opposed to medical use) cannabis industry could easily look like alcohol in the rules that will be set up.

Right now, adult use manufacturers can sell their products to dispensaries directly. Some use a distributor, but there is no nationwide mandate to – which is probably for the best. If a distributor isn’t a requirement, it forces brands to offer something new to differentiate themselves. It will spark innovation, rather than add an extra profit margin that will get rolled into the final price – a price that is already higher than it should be due to the murky federal legal status. Adding complexity and cost will only make it harder to compete with the illicit market. For the industry to grow, costs for illicit cannabis can’t be lower than its legal counterpart.

Of course, we are in the nascent stages of legalization here and we’ve come a long way culturally and technologically since the 30s. But remember, the rules governing alcohol were written nearly 100 years ago along with the passage of the 21st amendment repealing prohibition. Startlingly, those laws haven’t changed that much since they were written, so any mistakes made now in dealing with the cannabis industry could last for a long time.

A new way forward

What the cannabis industry needs is a new model for the adult use/recreational space, keeping some of what exists in the alcohol industry but without ever mandating use of a distributor – the middle tier. This would mean keeping Tied House Laws in place and applying them to cannabis so that a manufacturer could never hold an interest in a retailer, while still allowing them to sell directly to dispensaries and to consumers. Currently, some states allow for vertical integration, which would change under Tied House Laws.

This should be pretty simple, since most states are already separating licenses by type of activity (manufacturer, retailer, etc.) and it would promote competition while bringing the widest array of products possible to each consumer. Also, it would prevent any behemoths from squeezing out the up and comers.

extraction equipment — Constant innovation is a hallmark of the cannabis market and a key factor in continuous growth.

Of course, some retail license allowances could be considered on a case-by-case basis. For example, I would carve out an exception that growers/manufacturers could sell direct to consumers through a single “tasting room” at their brand home. This is similar to the operations of microbreweries, distilleries and wineries. It would encourage education for consumers, and provide great opportunities for brands to show why their products are better or unique.

Given the technology and logistics solutions available to businesses in a 21st century economy, mandated distributors create a sometimes-unnecessary barrier to an already efficient supply chain. If mandated, prices will inflate to cover added margin, thus making it harder to bring consumers over from the legacy market to the legal one. I’m not against the idea of a distributor – they can add tremendous value, but the mandate would seriously curtail industry growth.

Direct-to-retail and direct-to-consumer sales are necessary for the economic health and growth of the industry. Without this, using alcohol as a cautionary tale, at some point the middle tier cannabis brands will inevitably begin to wield an outsized amount of power. We are living at a time where innovation is going to be the key to explosive growth in the cannabis industry, so it’s important to do everything possible to let the market find its way without falling into a century-old trap.

March 31, 2021

New York Legalizes Adult Use Cannabis

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On March 31, 2021, New York Governor Andrew Cuomo signed The Marijuana Revenue and Taxation Act (MRTA) into law, legalizing adult use, home cultivation and possession of cannabis for adults over 21 immediately. Upon signing the bill this morning, previous cannabis-related convictions are automatically expunged, according to the Governor.

The bill establishes the Office of Cannabis Management, which will launch and manage the regulatory system for the commercial cannabis market in New York.

According to Steve Schain, senior attorney at Hoban Law Group, the Office of Cannabis Management will have a five-member board that will oversee not just the adult use cannabis market, but also medical cannabis as well as the state’s hemp market. For the medical market, the new legislation provides for more patient caregivers, home cultivation and an expanded list of qualifying conditions.

New York Governor Andrew Cuomo
Image: Chris Rank, Flickr

Troy Smit, deputy director of the New York NORML chapter, says the bill might not be perfect, but it’s a massive win for the cannabis community. “It’s taken a great amount of work and perseverance by activists, patients, and consumers, to go from being the cannabis arrest capital of the world, to lead the world with a legalized market dedicated to equity, diversity, and inclusion,” says Smith. “This might not be the perfect piece of legislation, but today, cannabis consumers can hold their heads high and smell the flowers.”

The MRTA sets up a two-tier licensing structure that separates growing and processing licenses from dispensary licenses. The bill includes a social equity aspect that requires 50% of the licenses to be awarded to, “minority or women-owned business enterprise, service-disabled veterans or distressed farmers,” says Schain.

Melissa Moore, New York State director of the Drug Policy Alliance, says she’s proud of the social equity plan the bill puts in place. “Let’s be clear — the Marijuana Regulation and Taxation Act is an outright victory for the communities hit hardest by the failed war on drugs,” says Moore. “By placing community reinvestment, social equity, and justice front and center, this law is the new gold standard for reform efforts nationwide. Today we celebrate, tomorrow we work hard to make sure this law is implemented fairly and justly for all New Yorkers.”

Schain says the new tax structure in the bill shifts to the retail level, with a 9% excise tax and 4%-of-the-retail-price local excise tax (split 25%/75% between the respective counties and municipalities). Revenue from cannabis taxes will enter a fund where 40% will go to education, 40% to community grants reinvestment fund and 20% to drug treatment and public education fund.

It appears that businesses already established in New York’s medical market get a head start on the new adult use market, while other businesses enter the license application process, according to Schain. “Although the existing Medical Marijuana licensees should be able to immediately to sell Adult-Use Cannabis, it will take up to two years for the New York’s Adult Use Program to launch and open sales to the public,” says Schain.