In January, route-to-market and incubator in the cannabis business Petalfast added SIP Elixirs to its brand portfolio, broadening its reach to include cannabis beverages alongside edible companies like Wana brands and a variety of flower companies. Just last week, it also began to work with Massachusetts-based, veteran led edibles company Freshly Baked.
Petalfast has been pushing its own expansion quickly in the past year, expanding into three more states, Arizona, Michigan, and Massachusetts, after launching in 2000 in California. The company is an early iteration of the kind of high-touch brand merchandising consultancy that is familiar to CPG brands, but operates in an environment in which most brands are brought to market by their producers, sans distribution services.
Petalfast’s founder and CEO is Jason Vegotsky, the founder of CPG brand Lawless Jerky who has also worked in the spirits trade. He believes he has found a hole in the cannabis market for middle-tier services like merchandising, field marketing, and retailer relationships that are often associated with product distribution in the food and beverage trade – he even has added order fulfillment services to his company’s set of offerings. Also bringing investment dollars and data services to bear, Vegotsky says he is looking to help emerging cannabis brands maximize revenue while operating as more traditional CPG brands.
BevNET spoke with Vegotsky about the environment for edible and drinkable cannabis brands, the differences in the cannabis retail trade around CPG basics like sampling and merchandising, and what it takes to build brands in this emerging industry.
What is the distribution environment like for cannabis beverages? What needs to change to allow that part of the category to really take off?
Right now, cannabis beverages are at an extreme disadvantage. If a typical supplier of beverages saw the dispensary channel beforehand, they would likely never choose to enter that channel. The dispensary landscape for beverages puts the category at a disadvantage because many of the stores don’t have pull boxes and have limited retail display and storage space. It’s very challenging even to understand where beverages are located in-store.
On the distribution side, a lot of the trucks and the salespeople are not beverage salespeople, so it provides challenges in how to sell in. But the main challenge is that retailers are not set up to sell beverages at scale or display them in the proper manner.
There’s no real middle tier in the cannabis business – what gave you the idea to still create a middle tier type of service company, and what are the key differences in servicing cannabis accounts than traditional retail?
The three-tier distribution model is commonly deployed by alcohol and traditional food and beverage companies because it allows each tier to scale its operations and focus on specific services. The three tiers include the brand, the wholesaler (sales + distribution), and the retailer in this distribution model. Because cash flow is a challenge in the cannabis industry, adding an extra tier by separating your distribution and sales is advantageous to brands as it decreases overhead and gives brands the ability to scale.
The sampling environment for cannabis has to be highly unconventional – how is it developing at the store level and at the consumer level?
Many states make it nearly impossible to get samples out of the metrc system [legally-required track-and-trace]. But sampling is key to getting buyers, brand ambassadors, and consumers to support a cannabis product. In order to properly get your brand out there, working the samples system is a major challenge.
At Petalfast, we have found that the sampling of non-medicated samples at the store level is key to building brand awareness.
You’ve done spirits merchandising and brand development in the past – how is it different in cannabis?
The biggest difference is stability. Cannabis does not have stability. In the alcohol beverage industry, once you are in a retailer, you typically know you’re going to be there for 3, 6, or 12 months and can plan and project. In cannabis, it is often unclear if you are going to be in a store long-term, if the retailer is going to be there, or if the distributor is going to be operational. Stability allows for planning and execution, but in cannabis, you have to stay as flexible as possible to compete.
You’re an investor – part of the incubation service – what kind of help do most of these brands need? What are the entrepreneurs bringing to the table, and what tends to be missing?
A newcomer to the space needs to fully understand what they are getting into. Many entrepreneurs come into the cannabis industry thinking that it’s going to be similar to alcohol/beverage or food/beverage, and that’s just not the case.
Our pilot program allows these brands to really dig into the market and understand the market so they can build a product that will adapt to the challenges.
What are the capital needs like to establish a quality brand in the cannabis space? What are you seeing as the biggest source of cash sink?
In the cannabis industry, the biggest challenge in the cash flow cycle is getting paid by retailers. Brands need to have a strong balance sheet to handle things and stay operational if a retailer doesn’t pay on time.
A lot of alcohol companies are investors in these brands – what are the advantages of the perspective they bring, and what don’t they see about the business?
Well-established alcohol companies looking to invest need to understand that capital alone will not be enough. The culture of cannabis is very different from alcohol, so success will be linked to their ability to 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.
How would you define service quality in the cannabis business, particularly for edible and drinkable partners? In other words, what are retailers really looking for at this point?
Cannabis beverages are attractive to those new to cannabis because they allow the consumer to more easily control the effects of THC. 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 more controlled environment.