By Daniel Stein
By 2023 the Cannabis industry will be a $23 billion* juggernaut driven primarily by adult or recreational use of cannabis and California is predicted to capture the largest piece of this pie (source: Arcview).
As a California based ad agency it’s hard not to look at those numbers and get starry-eyed. In similar industries, a category this large would throw off enough money to keep many agencies very busy … but this is no ordinary industry. 2023 is still a long way off and the current state of the industry feels very much like the Wild West.
Does it make sense for you jump into the fray, pick up some clients, gain experience and be well positioned when the growth hits? Maybe. But, if you do … keep in mind that getting in early also means dealing with all of the early challenges facing the industry.
Things like:
Tax Inequity
Even though cannabis is federally illegal in the US, businesses are still obligated to pay federal taxes. However those businesses are not allowed to write off normal business expenses, like advertising. So any advertising budgets are coming directly out of the business’s bottom line. This is just one force of many keeping ads budgets low.. Unless there is some fundamental shift in the Fed’s current thinking, there is no reason to assume this will change anytime soon.
Banking
Currently, banks may choose whether they want to do business with cannabis companies, and most chose not to. For big banks it’s simply too risky. For smaller banks, it’s too costly, due to the litany of compliance & legal issues.
So, with the exception of a handful of delivery services and some credit union-banked dispensaries, the industry is pretty much 100 percent cash-based--even in more mature markets like Colorado. So, make sure you have a big backpack, as you are almost certainly going to be paid in cash While this makes for great stories in reality it’s both complicated and dangerous.
Uncertainly
We are located in California, where adult-use of cannabis was voted in last November, but does not fully go into effect until January 1, 2018. The regulations are being written in Sacramento as we speak and a draft is due to be distributed in July. No one really knows exactly what this is going to mean for the industry. If California takes its lead from Colorado, we can expect strict childproof packaging laws, advertising restrictions, grow limits, inventory management regulations, testing requirements and, perhaps, even the need to sell through distributors, a la the wine and spirits industry.
Needless to say, in an already competitive industry, added rules and regulations will make it even more difficult to operate profitably. (Some analysts even predict that over regulation will result in a regression back to a black market of growers and dealers.) If California bans advertising for cannabis, agencies will need to get more creative with their use of content, sponsorships, PR, direct marketing and other forms of communication that have become standard practice in other highly restricted industries.
Understanding the Value of Brand
In the past, people made money in the cannabis industry because they were able to charge a premium by taking a risk for selling an illegal, or semi-legal, product. In the future, companies will make money by making good business decisions and investing in their brands. But this is easier said than done. There is a lot of “muscle-memory” in the industry that believes that marketing is unnecessary and the product will “sell itself.”
Lack of National Brands
Cannabis is a very localized industry. You cannot ship cannabis or cross state lines. All products sold in a state must be grown and processed in that state. With the exception of a few high-profiles brands with celebrity licensing deals, each state offers completely different brand and product offerings. Not only is this grossly inefficient from production or quality control standpoints, it also creates complications with trademarks and naming rights as many products and brands have identical or similar names.
From an agency’s perspective, this obviously means that there is no need for national campaigns. Most of the work currently done in cannabis is hyper-local which would be great if hyper local ad platforms like Facebook would take Cannabis dollars … which they do not. This means an agency is left with mainly lower budget city, or state print publications, outdoor, direct marketing and PR.
Technology and Peripheral Products
Technology will be a huge driver of this industry. From AI-driven grow systems to drones and form factor innovation to dose-regulating vape pens, canna-tech will lead to higher quality, consistency, cleanliness; discreet consumption; and production efficiencies.
Technology will also lead to more national marketing opportunities. Brands like Pax and HMBLT have proven that there is a market for technology-driven products, and many of these products can be licensed and marketed and distributed across state lines.
It goes without saying that cannabis is a high-growth industry in the middle of “growing up”. . Working for a cannabis company in 2017 feels a lot like working for an internet start-up in 1995. There is a ton of promise, a ton of uncertainty and lots of jockeying for position. However, one thing is certain: the brand landscape of 2023 will look vastly different from 2017. We predict the visionary companies that see the value of brand building and embracing a mainstream audience will emerge as the big winners. But, just like the dotcom crash of 1999, there will be more losers than winners and many of the ‘big’ first movers will sadly become footnotes in the history books.
Daniel is the founder and CEO of EVB. EVB is an advertising agency in Oakland, California that works in the cannabis industry and handles advertising, PR and marketing for Dark Heart Nurseries, Alchemy vape pens, Jack’s Extracts, STO Responsible and Harborside.