Why I Believe in Hemp - Part 2

Apologies that it’s taken me a few weeks to get around to posting this. These posts take a while to write - sometimes I feel like an episode of This Week Tonight. So, I know that many in the industry dislike talking about the BUSINESS of cannabis. But the fact is, we are now a legitimate industry (I mean, sort of, since cannabis is still federally illegal, but I digress). And as an industry, whether you like it or not, we are often driven by decisions made as businesses. So let’s get into the business points of why I believe in hemp as a business.?

1. Hemp is federally legal. I know that this is an obvious point, but many people do not know what it means to operate a business under a structure where we are legal on the state level, yet illegal on the federal level. Actually, I think only people working in the cannabis industry know what that’s like. I am not going to get to ALL the hurdles that we as an industry face when we operate as federally illegal businesses, but here are just a few big ones:?

• Access to banking. I like to tell people stories about when I first entered cannabis, back in the medical days, when it was a cash business. Never in my life did I think I’d be paying vendors $30k in cash, which I carried around in a brown paper bag, stuffed into my backpack, hoping no one would notice me. Giant safes in offices, where all the cash and inventory was stored, was a common sight. And why did we do this? Because banks wouldn’t work with us, meaning we had no access to checking accounts, saving accounts, loans, credit cards, etc. Why was banking limited? Because financial institutions, which tend to be very conservative, refuse to work with businesses that are federally illegal. This has changed somewhat in recent years, with more access to banking, and I’m really thankful for that because I don’t miss the days where break ins, theft, robbery were all every day parts of working in cannabis. (actually it’s still the case, but a lot of that is centered around retail now). However, our access to banking is still extremely limited, and bank accounts get shuttered all the time. On the federal level, multiple attempts have been made by Congress to pass the SAFE Banking Act , which in a nutshell, would allow federally regulated financial institutions to provide services to cannabis businesses operating in states that allow for a legal cannabis market. Efforts to pass this law have failed - repeatedly. So for now, we’re in a bit of a holding pattern. With hemp, we now have access to all the banking and financial resources that we need.?
• Taxes and 280E. There’s something everyone in the cannabis industry is familiar with, and it’s called 280E, a part of the IRS federal tax code, which forbids businesses associated with Schedule I or II substances from deducting business expenses. This is a more complicated way of saying, we as cannabis businesses, cannot deduct standard business expenses from our taxable income, where the tax rate is in the range of 20%, and instead get taxed on gross income, where the tax rate is more like 70%. So….we get taxed A LOT. This is on top of state, city and local taxes. And did you know that the cannabis industry are taxed at every level - from farming, to manufacturing, distro and retail. Oh and yes, we may run federally illegal businesses, but we still have to pay taxes to the federal government. If you’ve shopped in dispensary, and think you’re buying a $20 product, and end up paying $27 (what we call the out the door price), you can blame that on taxes. With hemp, 280E no longer applies.?
• Operational Efficiencies - My background is in operations, and because of that, operational efficiencies are a huge deal to me. As federally illegal businesses governed by 50 different sets of state regulations, we cannot ship product across state lines. In fact, all the active materials (the one most familiar to all of you is THC) must be grown, manufactured and distributed within state borders. I think the most absurd example of this is Hawaii - a state that has legalized cannabis for medical use. However, products containing THC cannot be shipped to another island. The crazy part is that a lot of cannabis is grown on Kona, but the majority of the population lives in Oahu. But, if you fly product between islands, you enter federal air space, and if you send it on a boat, you enter federal waters (believe me, they’ve tried for a while). Even states that have legalized cannabis use and are connected to each other - Washington, Oregon and California, cannot ship product to each, though they are trying (and failing) to get laws passed to allow it. What does this mean? It means if I want to sell my brand and products in multiple states, I have to either build manufacturing in every single state, or partner with someone who will make my product in each state, unlike any normal business, where I can produce at a single manufacturer and ship around the country. This is obviously incredibly capital intensive, difficult and expensive to manage, and extremely inefficient. With hemp, you can now manufacture in one state, and ship product to various destinations.?2. Points of Sale

Before legalization in CA, it was estimated that there were around 2000 points of retail where customers could purchase cannabis with a medical recommendation. 6 years later, in the legal CA market, we have not yet recovered to reach even that many points of sale. Exact numbers are difficult to come by, because though licenses have been issued, that doesn’t mean a retailer is operational, and with cannabis retailers shutting down left and right these days, it’s really hard to get an exact number, but it’s estimated to be around 1300 store front retailers in the entire state, according to NABIS , which services about 99% of the California market. In NY, which has had a legal market for over a year now, there are less than 30 retail locations serving a population of nearly 20 million people. Though traditional retailers have been slower to accept hemp products, and most products are currently sold in smoke shops, CBD store and some convenience stores (depending on state regulations), I’d like to give the example of Minnesota, which currently has some of the most liberal states laws in regards to retail sales of hemp products. (I will note that this is an ever evolving landscape, and many states have no laws at all). Minnesota state law allows hemp products to be sold in virtually all retail outlets, for example: grocery (Whole Foods), liquor stores (Total Wine), bars, taprooms and restaurants. Using this example, the Minnesota Grocers Association represents 1300 retail store locations; according to the Minnesota State Auditor reports, at the end of 2021, Minnesota had 212 municipal liquor stores. This is to serve a population of 5.7 million. In comparison, the California Grocers Assocation represents over 6000 food stores for a populations of just under 40 million people. The point being, the sheer number of potential points of sales across multiple states makes operating in hemp very attractive.?

3. Direct shipping to consumers

And finally, we get to direct shipping to consumers. For those of you who have purchased cannabis in a legal state, you know that you must purchase through a licensed retailer or delivery service. By law, all products must go through what we call the licensed chain of custody, which means that starting from the cannabis seed, the industry tracks and transfers product from one licensed entity to another licensed entity -? from grower, to manufacturer, to distributor to retailer. The product only leaves the chain of custody upon purchase by a customer. You may think that you’ve purchased products directly from a cannabis brand, because you went on its website, purchased it, and the product was delivered to you. In fact, the back end is completely run by a licensed service. What is my point? Well, when your product has to go through all these touch points, it gets expensive.?

I’ll give you a really simplified example. Say a bar of chocolate costs $2.50 to make. I sell it for $10 to a customer. So I make $7.50 per bar. However, in cannabis, by going through a licensed chain of custody, BY LAW, I need to sell it to a retailer, who will buy the bar for $5 and sell it for $10 (hopefully, they may sell it for $15 knowing cannabis, but I digress), and before it gets to the retailer, I have to go through a distributor who will charge me 20%. So through this licensed change of custody, I take my wholesale price of $5 minus $2.50 (the cost of the bar), minus $1 for the distributor charge, and I’ve now made $1.50. You can see why selling directly to a customer is very appealing, and many companies outside of cannabis have started their businesses like this: Allbirds, Omsom, FlybyJin, XLB (now Mila), and many more.

Additionally, when I sell to a retailer or distributor, I don’t own any of my customer data. I don’t know why type of person consumer bought the product,? which means I can’t directly market to them. And believe me, the retailers are NOT sharing the information with me. So as you can see, by direct shipping to consumers, brands gain a lot. First, they control their own pricing. Second, they make a much higher margin for their products, and third, and maybe most importantly, they control their own customer data.?

In my next post, I will get more into the costing and math of the hemp compared to regulated cannabis.