Startups Vie to Become the Starbucks of Pot | Adweek Startups Vie to Become the Starbucks of Pot | Adweek
Advertisement

Who Will Become the Starbucks of Pot?

Handful of startups want to be America's favorite marijuana brand

During a typical Fourth of July weekend, 1500 Esperanza St., a whitewashed deco warehouse in the Boyle Heights district of East Los Angeles, is deserted. But this year, a line snakes down the broken sidewalk out front and wraps around the bend of Union Pacific Avenue, as 4,000 people suffer the searing heat for an event called the California Heritage Market.

Cheryl Shuman | Photo: Karl J Kaul/Wonderful Machine

While many cities boast farmers markets, this one is unique: It’s the first in California—and likely the entire country—devoted exclusively to pot. 

Here, some 50 growers proudly peddle their homegrown weed, not only in the form of dried flowers and buds but also the myriad products that can be concocted from them—from cooking oils, tea and candy to ointments, sunscreen, even soft pretzels. 

Cheryl Shuman surveys the crowd with satisfaction. Not only did she help organize the event, but her own brand of weed—Beverly Hills Cannabis Club, a favorite of celebrities with gated mansions up in the Hollywood Hills—is the most recognizable product there. Scratch that. “We were the only branded product there,” she boasts during a phone interview a few days later. 

While all the vendors here are expected to bring to market only the finest-quality herb, very few, apparently, showed up having taken Marketing 101. “Growers were coming up to me and asking, ‘How do we make ourselves different? Maybe we should come up with a logo and a name,’” Shuman reports. “The branding of cannabis doesn’t exist yet.”

There is a good reason for that. Since the federal government still classifies pot as a Schedule I controlled substance and only two states (Colorado and Washington) permit its sale on a recreational basis, market conditions are not exactly ripe for branding. “You have 20 states with some form of legalization, a number of them very restrictive, and a small customer base. So there’s not a national opportunity,” explains Taylor West, deputy director of the National Cannabis Industry Association. But, she hastens to add, “I think we’re likely to move in that direction.”

That’s actually happening fairly quickly. Industry watchers predict that 14 states are likely to adopt some level of legalization in the next five years. (The New York Times over the weekend even came out in favor of legalization.) They have powerful incentives to do so. Not only do most Americans favor legalization (58 percent, according to a 2013 Gallup Poll), but legal cannabis amounts to tax revenue for cash-starved municipalities. Colorado, for example, is on track to collect $134 million from its first year of legal pot sales. And while the DEA still publicly pledges to eradicate marijuana, a growing number of elected officials, including President Obama, are of the belief that the feds have better things to do than go after stoners. If the legalization trend continues at a pace many expect it to, the legal marijuana market—worth an estimated $2.57 billion today—will hit $10.2 billion by 2019.

It translates to a veritable gold rush for pot startups (“ganjapreneurs,” as they’ve been called)—companies that market everything from vaporizers to fashion-forward receptacles for your stash. But feeder brands that exist for pot are justifiably separate from actual brands of weed, which are still pretty rare. As Joe Hodas, CMO of the edible cannabis brand Dixie Elixirs, observes: “The closer you get to the plant, the fewer the people involved.”

Bath soak, for a truly trippy dip.

That said, there are a handful of brands out there, and they’re growing. And that has raised some questions among traditional marketers. We all know that every category, from European imports to beauty products, has its leading brands, so which are the brands shaping up to dominate cannabis? Is the day coming when we could see a Marlboro (or Starbucks, or Mercedes-Benz) of pot?

Ron Throgmartin thinks so, and believes his company is a contender. “We saw the opportunity to come into this because there are no specialty brands in the market,” says the CEO of Kirkland, Wash.-based Diego Pellicer. Named after a legendary hemp grower in the colonial-era Philippines, the brand is sold through dispensaries, though its ambitions go well beyond that. “We’re hoping to create the Apple of marijuana,” Throgmartin boasts.

It’s not a surprise that some of the best, brightest and most ambitious entrepreneurs have designs on the space—Diego Pellicer’s seed money comes from Jamen Shively, a former corporate strategist at Microsoft. But building a cannabis brand isn’t as easy as throwing money at it. 

That’s because most consumers of cannabis don’t think in terms of brands just yet. The majority of legal pot is sold through dispensaries—storefronts grafted onto large cultivation spaces. While it comes in assorted varieties (indica, sativa, ruderalis), it’s mostly sold as a commodity.

Throgmartin thinks the market will quickly evolve to the point where consumers will shop for their favorite pot brands just like they shop for a preferred brand of beer or sneakers. But getting there will mean convincing buyers that branded pot is worth paying more for—a leap that will require not only the highest quality product but also some slick marketing.

Sunflower seed fudge, with a buzz.

Diego Pellicer’s packaging, which features a 19th-century rendering of Señor Pellicer and a wood-grain design, has the look and feel of a box of pricey Cuban cigars. “We’re going to deliver an experience unlike anything that exists now,” says Throgmartin, whose plans call for boutiques in Seattle and Las Vegas sporting lots of glass, lots of light and plenty of parking. “It’s going to be a beautiful store, not a typical head shop or dispensary with bulletproof glass,” says the CEO.

Despite their insistence that they are selling medicine, these cannabis dispensaries look more like pawn shops than pharmacies, with their bright neon baggies of Bubba Kush and armed security guards. Seattle’s The Green Skunk, for example, advertises “Free Gram Friday” and features a heavy-lidded, thoroughly baked Pepe Le Pew as its mascot.

Any marijuana brand with serious ambitions will have to move beyond such whacky-tabacky tactics, says Olivia Mannix, co-founder of the marketing agency Cannabrand, whose mission, she explains, “is to rebrand cannabis and debunk myths and stereotypes associated with the plant.” Mannix thinks the wholesale legalization of pot for recreational use in the U.S. may be as soon as a decade away, and only the “more tasteful” brands will stand a chance of capturing major market share when that day arrives.

Cannabrand’s clients include Bold Harvest, an edibles maker that expects to enter the market by early next year. Its founder, Jonathan Umbel, a 30-year veteran of the restaurant industry, hopes to differentiate his purees, mints and energy drinks in part by linking up with a celebrity chef to endorse the products.

Umbel and other startups will find themselves going up against the 800-lb. gorilla of the space, Dixie Elixirs, which dominates the edibles market.

THC extracts: a little drop'll do ya.

“Not only do we have the potential to be a national brand, we’re intent on making that happen,” says Hodas. Billing itself as “the future of cannabis,” Dixie Elixirs has 30 products on the market, ranging from blueberry soda to chocolate chews. With its brushed stainless-steel bottles and clean, minimalist design, Dixie’s packaging would not look out of place on the shelves of Whole Foods (which, for the record, does not carry the products). In short, the brand profile is more Scandinavian than skunk. 

“One of the reasons you see so few brands is because of the regulations,” says Hodas, citing the scores of state laws that govern products containing THC. In fact, since no cannabis product can be transported across state lines, brands like Dixie Elixirs cannot rely on the traditional hub-and-spoke distribution system most brands take for granted. To get around that, the company recently formed Dixie Brands Inc., which is licensing the brand name to growers in other states.

Like many in the trade, Hodas likens cannabis marketing to that of alcohol. “You could say that all bourbon is bourbon—it’s the same proof, so what’s a brand matter? But it does matter,” he says. “We know people have an affinity for product quality and consistency, which is what we offer.”

 It follows that if a consumer will reach for a name brand of pot, some will prefer a luxury brand. When they do, Shuman will be waiting.

Her presence at the East L.A. farmers market was a bit of an anomaly. She usually rubs elbows with fancier folks. Until recently, you’d have to be invited to a celebrity bash in Bel Air to sample pot from her Beverly Hills Cannabis Club, whose premium bud fetches $700 an ounce. But seeing an opening in the market for high-end weed, Shuman recently decided to “crank it up,” as she says.

“Up to this point, our product was never available to anyone outside of our club members, but because of the success we’ve had, I’m doing more grow operations,” she says. Shuman is partnering with select growers in Denver and Seattle, where high-end outlets are also being planned. 

The brand’s image is already well established. BHCC comes wrapped in 14-carat gold leaf and its logo is a clever riff on the famous Beverly Hills municipal signs seen throughout the neighborhood and designed by Warner Bros. in the ’30s. “It was the best thing I’ve ever done, making the decision to go with graphics and product design,” Shuman says.

Given the projected growth of the cannabis trade (forecast at 68 percent in the next year alone, according to ArcView research), why aren’t there more contender brands out there? Part of it has to do with the seedy—and dangerous—nature of the business.

Dispensaries have bulletproof glass and heat-packing security guards because banks and credit card companies refuse to do business with them, which makes them cash-only enterprises—as well as targets for thieves. Such a Fort Knox-style atmosphere is the reason “there’s nobody doing any amount of in-store or point-of-sale marketing,” as Hodas explains.

Thus, as Diego Pellicer’s Throgmartin notes, pot brands don’t have any sort of model for expansion. “Federally, with the semi-legal environment we’re in as producers and growers, there’s hardly any experience in how to move forward,” he says.

Shuman is more blunt. “If you put your head out of that little cannabis closet, you risk arrest and prison,” she says.

What’s more, traditional print and broadcast media will not accept ads for weed, nor will Facebook, Twitter or Google AdWords.

“Until cannabis is off Schedule I federally, that’s the reality,” says cannabis entrepreneur Vincent Mehdizadeh (see sidebar). “It’s Prohibition-era alcohol what you’re seeing with cannabis right now.” There’s nothing, meanwhile, stopping a marijuana marketer from setting up a website (“search is the Holy Grail,” as one seller puts it), but cannabis brands will largely be confined to obscurity as long as they are ignored by major media organizations and agencies.

Sodas come in eight flavors.

Ad agencies seem as wary as anyone about doing business with marijuana brands. Take Eric Schiffer, CEO of DigitalMarketing.com, who has plotted digital strategy for Fortune 500 corporations but remains unwilling to take on cannabis. “We’d have to sort of wait and see if it’s a fit for us,” he says. “If you get into advertising this stuff, you’re basically telling kids it’s OK to start smoking pot young, and I don’t agree. We’re only as good a country as the next generation of young people, and we have a duty to send the right messages to them.”

Then, there’s the fear that big pharma or big tobacco—which already have limitless production capacity and rich marketing budgets—are simply waiting for weed to become legal everywhere, then step in and wipe the smaller brands off the map.

Just ask Todd (who asks that his last name not be used), a California entrepreneur who runs a boutique pot-distribution network called MarijuanaMarket.com. Todd delivers “top quality” flower and edibles to members of his collective, and though business is good, he doesn’t expect it to last. “We’re all really small companies,” he says. “When the big boys—Monsanto, Pfizer—come in, none of us will be needed here. I expect massacres when they really know the real money [involved].”

Pfizer did not respond to Adweek’s queries about the prospects of it getting into the pot game, but a spokesperson for Monsanto said: “Rumors like this have been circulating online. Monsanto has not and is not working on cultivating cannabis. We also have not and are not working on GMO marijuana. That allegation, if you happen to come across it while writing your article, is also an Internet rumor and lie.”

Still, entrepreneurs remain wary about getting clipped by bigger players down the road. “I’d be naive to think that [industries like] big tobacco would never come into the industry,” says Umbel of Bold Harvest. “A lot of them are already way ahead. I’ve heard of large-scale production facilities regulated by one producer. I’ve heard of all kinds of things. I’m pretty sure this is going to happen.”

Ditto for DigitalMarketing.com’s Schiffer, who believes that before long “you’ll find smart operators and maybe even a tier-two pharmaceutical company that decides there’s too much money to be made not to participate.” That company, he says, “will put together a far more professional, quality-focused brand, backed by the marketing talent that has driven an Apple or a Starbucks or even a Pfizer. And all that’s coming.”

For now, the relative handful of pioneering pot brands have the market all to themselves. Beverly Hills Cannabis Club recently signed a development deal with Fremantle Media and filmmaker Morgan Spurlock for a show—working title: High Society—that will follow the adventures of Shuman and her daughter Aimee as they build their brand.

As Shuman sees it, “Someone has to take center stage.”

Advertisement