The Business of CBDs

Cannabidiols, herbals put retailers in a happy place

CHICAGO -- As marijuana legalization moves forward state by state in the United States and on a national level in Canada, convenience retailers may be wondering when they’ll be able to tap into what is expected by 2026 to be a $50 billion market.

That inroad may be more accessible than retailers think, as a new offshoot category that’s loosely tied to marijuana becomes a viable opportunity for more and more c-store operators. Cannabidiols, or CBDs, are medicinal remedies derived from marijuana or other source materials, but they don’t contain the psychoactive ingredients associated with pot.

On the federal level and in most states, retailers can legally sell many of these products and other medicinal remedies at a time when demand is rising among consumers. However, the very nature of CBDs can make the category confusing to manage, because it can encompass multiple remedies. They include:

  • Cannabis from which the psychoactive element, tetrahydrocannabinol (THC), has been extracted. (See glossary.)
  • Hemp, which is a familial plant to marijuana but not officially cannabis and void of THC as a base source altogether.
  • Kratom, a medicinal herb derived from a Southeast Asian plant [CSP—Aug. ’18, p. 63]. Kratom often gets swept up into this category too, even though it is more related to the coffee plant.

Despite its potential health benefits, kratom has also been tied to recent U.S. Food and Drug Administration (FDA) concerns, with certain products being linked to salmonella and others allegedly making false claims. (See coverage online at cspdailynews.com.)

These products can also take different shapes and forms when they enter the store, including in oils, tinctures, ointments, capsules or pills. And they can show up as an ingredient in bottled water, gummy candy or in both combustible and vaping products.

Because people use CBDs for different reasons, the use case or occasion will differ. Generally, though, they are used for relaxation; to remedy anxiety, inflammation, depression or stress; and alleviate symptoms of cancer.

Meanwhile, a relaxing of the rules around producing CBD products and growing approval of using them are creating a more bullish view of the new category.

According to Brightfield Group, a Chicago-based market research firm, the U.S. hemp-derived CBD market has nearly doubled in size from 2017 to 2018, “but the five-year growth projections for this market are now dramatically higher than they were a year ago.” Major soft-drink manufacturers such as The Coca-Cola Co. and PepsiCo have been mulling the potential of CBD-infused beverages.

The trend suggests that manufacturers and c-store retailers have plenty of room for experimentation with CBDs.

Bringing CBD to Retail

Retailer Smoker Friendly, Boulder, Colo., is starting to do good business in the emerging category of medicinal remedies, including cannabidiol (CBD) products.

For example, 43% of sales in Smoker Friendly’s “alternative products” subcategory are from herbal remedies. Smoking pipes are second at 37%, followed by smoking accessories at 12% and butane-related products (mainly lighters) at 8% of sales, Keelan Gallagher, director of trade marketing and brands for the convenience-store and smoke-shop chain said during an educational session at the 2018 NACS Show in Las Vegas.

In Smoker Friendly’s subcategory of herbal remedies, 74% of sales are from products made from medicinal herb kratom. The rest includes detox products and other CBDs, Gallagher said. “The goal is mood control,” he said. “People are looking for the right state of mind.”

Smoker Friendly is seeing margins for kratom and detox products in the range of 50%-65%. CBD tinctures or oils have a 45%-60% margin, but sales have started out slowly at Smoker Friendly stores. In January 2018, CBD transactions averaged less than 100 a week, but by August, that number had spiked to more than 300 per week.

“We’re sophisticated enough to take off what doesn’t work and put up the next thing.”

For retailers just starting their research, Gallagher suggested watching a documentary about kratom called “A Leaf of Faith,” and looking to the American Kratom Association, Haymarket, Va., and the Botanical Education Alliance, Richmond, Va., for resources.

Retailers need to fully understand product-liability issues, and also ask about manufacturing processes and for third-party lab analysis, he said. Retailers can also ask to visit the manufacturer’s production facilities.

Retailers should also look to wholesale suppliers for help. “If your distributor is carrying it, it’s probably doing well,” Gallagher said.

Speaking at another NACS Show educational session, Lou Maiellano, president of TAZ Marketing & Consulting Group, Sevierville, Tenn., said retailers need to do their due diligence. “There are so many mistruths out there,” Maiellano said. “So many [companies] are trying to place product and run.”

However, if retailers are willing to do the legwork, Maiellano said, they can capitalize on the opportunity with an alternative products rack, housing everything from cannabidiol-based herbal remedies to nicotine toothpicks. In his presentation, he showed an illustration of three rack options, including two 2-foot-wide racks of different heights and a smaller counter option. The taller racks had room for peg-hanging products, but all three had space for products of various shapes and sizes. A banner sign positioned above the rack dubbed the product category “New Age Alternatives,” with a tagline of “Experience the new in you.”

While CBDs and hemp-based products have a connection to the combustible form of marijuana, panelists in the NACS Show sessions did not recommend managing them under any specific category. Whether retailers include them as part of the tobacco category or not, Maiellano’s underlying advice was to experiment.

“We have to put stuff out there, and if it’s not going to make it, that’s OK,” Maiellano said. “We’re sophisticated enough to take off what doesn’t work and put up the next thing.”

Suppliers of CBD products recognize the potential confusion. Case Mandel, CEO and co-founder of Cannadips, Arcata, Calif., produces CBD pouches that consumers orally absorb. It resembles chewing tobacco, but it’s a medicinal product. “It’s a healing, wellness affect,” Mandel says. “Products like this are the next wave. I’m not knocking vice chemicals, but these are healthy alternatives.”

Similarly, Floyd Landis, founder and CEO of Floyd’s of Leadville, in Leadville, Colo., says retailers are concerned about educating their own employees about new CBD products. But once that hurdle is overcome, “[CBDs] in general appear to be on the cusp of becoming a very large category,” Landis says. “It’s a natural replacement for prescription medications and other synthetic [remedies] like Tylenol.”

Legal Hurdles

Cannabidiol, or CBD, products and other herbal remedies are probably the most direct way convenience retailers in the United States will be able to sell cannabis-related products. This is even as nine states—Alaska, California, Colorado, Maine, Massachusetts, Nevada, Oregon, Vermont and Washington—as well as Washington, D.C., have legalized the purchase of marijuana, according to Scott Sinder, partner with law firm Steptoe & Johnson, Washington, D.C.

As one of the fastest-growing industries in the country, marijuana will become a $50 billion business by 2026 and add 1 million new jobs, Sinder said, speaking at the same education session as Gallagher.

Despite the huge economic potential, marijuana remains a Schedule 1 drug at the federal level; as an illegal substance, it carries challenges for manufacturers and suppliers in terms of banking and insurance.

As a result, hemp and CBDs have been in a legal limbo federally. Both have histories with the U.S. Drug Enforcement Administration (DEA) as having Schedule 1 classification.

Research farms have been allowed to grow hemp since 2014 as a result of congressional action, and the 2018 Farm Bill signed by President Trump in December removed hemp from the list of Schedule 1 drugs, opening the door to hemp farming in the United States.

And as for CBDs, the DEA announced in September that drugs with THC content below 0.1% are now considered Schedule 5 drugs (having the least likelihood of addiction and fewest regulations), as long as they have been approved by the FDA, Marijuana Business Daily reported.

For hemp and CBDs, their extremely low levels of THC and the legalization of recreational marijuana in several states has encouraged the introduction of the products across the country.

State by state, however, the scrutiny and confusion continues. California law, for instance, prohibits industrial hemp-sourced product from use as a food additive, ingredient or dietary supplement unless deemed so by the FDA, according to a Forbes report. And in Ohio, customers can legally obtain CBDs only at licensed medical-marijuana dispensaries.

More: The Shape of CBDs

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