A few doors along from the Warby Parker eyewear store in Queen West, Toronto’s creative neighbourhood, lies a coffee shop with a twist. Inside it looks a bit like an Apple Genius bar as a steady stream of customers buy flat whites and single origin coffees. But Tokyo Smoke’s flagship cafe also sells more unexpected products – among them ceramic bongs, herb grinders and ‘smell proof’ toiletry bags.
On their way to Tokyo Smoke, customers might have attended a cooking class at the Cannabis Cooking Co or popped into the upmarket marijuana dispensary Eden. They are just three of more than 100 businesses serving the cannabis industry that have opened in Toronto since the drug became medically legal in 2013. According to experts, there’s enough demand for 1,000 more.
To say Canada has become ground zero for the cannabis industry in recent years is an understatement. In mid October, it will become the largest country in the world to legalise the production and sale of marijuana for adults, making state-by-state rules obsolete and opening up inter-state trade. Around 150 dispensaries will open in Ontario, the province in which Toronto sits, with local colleges introducing courses such as Medical Cannabis Fundamentals for Business Professionals.
Slowly but surely, other countries have been catching up. In the US, cannabis legalisation varies from state to state, with just nine having some form of recreational legalisation. More than 20,000 people in Colorado work in the cannabis industry; the state, one of the first to legalise recreational cannabis, raised £191m in ‘marijuana taxes’ in 2017.
Experts say that if cannabis was legal across the US at a federal level (creating a uniform policy across the country) the industry could be worth as much as £60bn by 2030 – or roughly the same amount that Americans spend each year on fizzy drinks.
Investment bank RBC Capital Markets reckons legal weed sales could even eclipse beer and wine. ‘Driving the growth is recreational use of the product, particularly concentrates and edibles,’ analyst Nik Modi said in a client note in August. ‘Estimates already suggest that the US category alone is £39bn, which compares to spirits (£45bn), wine (£50bn) and beer (£70bn).’
To support this nascent industry, cannabis- specific investment funds such as Privateer Holdings (which has a war-chest of £155m) and Tuatara Capital (£71m) and Casa Verde Capital (£34m) are looking to find the next big opportunity.
Big business is also trying to needle its way into the space. In August, Constellation Brands – one of the world’s biggest drinks companies – invested £3bn into Canadian cannabis producer Canopy Growth, and has begun developing a range of cannabis-infused drinks. In the US, Walmart and Home Depot have struck deals with American Cannabis Company to distribute its range of growing equipment. It is also rumoured that Phillip Morris Tobacco is sitting on swathes of land that it can switch on to cannabis cultivation as soon as the substance is given the federal green light.
Despite all of the cash flowing in, a few notable players are missing. Google prohibits cannabis businesses from advertising on its platform and, despite its pharmacy plays, Amazon isn’t selling weed. For these global platforms, until cannabis becomes federally legal, it’s just too difficult for them to work with. Even if Amazon were to try selling weed to Canadian customers, it would have to make sure the plant never landed in any of its US distribution centres, which it routinely uses to fulfil orders to Canada. Logistically, it’s a nightmare.
The opportunity, then, for small businesses becomes even greater. Without the spectre of Amazon looming, they can establish themselves in the so-called ‘cannabusiness’ ecosystem. When weed becomes nationally legalised, it’ll make more sense for Amazon and Google to buy these companies rather than recreate or compete with them. The path to exit is crystal clear.
Leaflink is one company venture capitalists are predicting will become big enough to exit before federal legalisation kicks in. It’s essentially an online marketplace, like eBay, for cannabis: founded in 2015, the company connects more than 600 cannabis brands with more than 2,000 dispensaries and retailers. It’s the first cannabis brand to appear in Fast Company’s Most Innovative Companies list and, in November 2017, it raised £7.7m from a number of funds, including Snoop Dogg’s cannabis-focused venture firm Casa Verde Capital and UK-based Nosara Capital.
Leaflink is benefiting hugely from the fact that the likes of Amazon and eBay have done so much groundwork educating business owners on how to use marketplace platforms – and now it’s able to leverage that knowledge in an environment they can’t enter.
‘The cannabis industry is so young and a lot of people working in it are so young. [They] grew up with e-commerce, so it’s easy for the person who owns the dispensary to understand the concept of using an eBay-like marketplace to connect with the supply side and keep track of inventory,’ Nosara’s Ian Loiseaux, who is now also Leaflink’s chief financial officer, says.
As a result, a significant number of transactions move through the Leaflink platform. Loiseaux says that the average Leaflink retailer in Colorado uses the platform 17 times per month, spending around £1,200 per order.
He also adds that businesses like Leaflink – which don’t touch the plant – are a safe bet. ‘Your downside risk is much more limited if you’re an ancillary business rather than a regular plant touching business,’ he says. ‘It’s like selling shovels in the gold rush. The more competition there is [among growers], the more prices come down, margins come down.’
While Leaflink has successfully created a B2B marketplace, selling to consumers isn’t so straightforward. Starting up in an industry that doesn’t yet have its share of consumer-facing ‘Netflix for’ and ‘Airbnb of’ ventures, which do the legwork in explaining to customers what a product is and why it’s worth spending money on, means the onus is on the startups to educate people.
Charles McElroy runs Goldleaf, a business which sells printed supplies in Ohio, a state which has not legalised recreational marijuana. His products – books and posters – don’t break any laws and are even for sale on Amazon. Goldleaf’s illustrated ‘patient journals’ (where users record symptoms and how they respond to different strains of cannabis) are the first of their kind, and feature regularly updated information on the health benefits of cannabis and how to choose between the strains. McElroy has since gone on to add growing guides and a range of stylish educational posters to Goldleaf’s range. The company also provides a white-label service for dispensaries, creating patient literature.
The presence of McElroy’s business, which launched in 2016 after he sold his previous venture, clothing brand Noble Denim, has been challenging for his Trump-voting neighbours (Butler County, where McElroy’s business is based, has consistently voted Republican since 1968).
In spite of his involvement in the cannabis industry, McElroy has also created a handful of jobs in the area and supports other local businesses who print, bind and distribute his journals. On balance, he says his neighbours respect what he’s doing for the local economy. He has around 100 wholesale customers, which include dispensaries, medical cooperatives and several boutiques. Next year, Ohio votes to legalise cannabis for recreational use. Whether McElroy has created a positive enough impression on the community will be put to the test.
Still, he explains, his mission is to keep educating people on the benefits of cannabis and, in turn, help the rest of the ecosystem around it to keep growing.
‘It’s not just the journals we make, it’s the content inside that we invest a great deal of time and effort creating,’ he says. ‘I wanted to create something completely distant from the usual stoner aesthetic, and basically make the science behind medical cannabis and cultivation more approachable and less intimidating.’
Over 2,300 miles away from Ohio, in the state of Oregon, the weed industry has a completely different look and feel. Recreational cannabis has been legal here for four years and, as of 20 August 2018, the state has almost 600 active retail marijuana licences.
The atmosphere in Oregon is much more similar to that of Ontario, Canada: weed yoga classes, wellness stores selling pre-rolled joints and dispensaries are commonplace.
Like McElroy, Portland resident Mauria Betts is keen for the weed industry to cast off its childish stoner aesthetic. She has built a business, the branding agency Potency, around helping cannabis startups to do just that. The company’s client list includes gourmet edibles company Cannavore, cannabis oil brand Select and Stem Holdings, a company which leases cultivation and retail real estate and has gone on to float on the Canadian stock exchange.
‘It’s part of our job as a branding company to change people’s perceptions and educate the public,’ she explains. ‘That’s a huge challenge but also the responsibility of all the new cannabis companies.’
Betts says that, while working for an agency that specialised in the food, drink and retail sectors, she was approached by a number of cannabis brands. ‘Demand just became so large that I decided to start an agency specifically working with the cannabis industry,’ she says. ‘I was working for a boutique agency before, but they weren’t interested in working with the cannabis industry.’
Clients come to get their own variation of what’s now become Potency’s signature branding look (and taps into a new cliché surrounding modern weed businesses): wholesome, natural and organic.
Is Betts worried that when federal legalisation kicks in legacy agencies like Ogilvy or Publicis, which can promise a more mainstream branding job, will snap up her future clients? ‘There’s definitely going to be certain companies that want the notoriety of that type of agency,’ she admits. ‘But having all this knowledge and experience – and we have a pretty big portfolio of cannabis brands we’ve worked with that have been successful – [other] agencies coming into it won’t have that.’
Betts says her clients also rely on Potency’s expertise on the rules around cannabis packaging and retail display, as well as knowledge of the advertising space.
‘The regulations change from state to state, so compliancy is a really big issue. If you’re working with someone who isn’t necessarily familiar with the type of packaging you need to use [that’s a problem],’ she explains. She says most weed brands are limited in terms of where they can advertise – outdoor ads are only permitted in some states, while online advertising is generally off limits.
Print media offers brands an interesting advertising alternative. Anja Charbonneau, editor-in-chief and founder of cannabis lifestyle magazine Broccoli says cannabusinesses are looking for ways to get their brands seen. ‘[They are] seeing the magazine and getting excited about it,’ Charbonneau says. ‘[Our ad pages] are pretty much full for the next issue and we are really trying to make sure that editorial to advert ratio doesn’t get broken.’
Having been greeted with such enthusiasm from advertisers, Charbonneau has decided to give the magazine away for free. Broccoli is distributed in 40 countries, and a new issue is released every four months. Features include a journey through one of Japan’s infamous ‘love hotels’, where readers are encouraged to imagine themselves walking through the different rooms while stoned, and interviews with high profile women such as Stella Bugbee, editor-in-chief of lifestyle magazine The Cut and Bob Marley’s granddaughter Donisha Prendergast. Advertisers include Goldleaf, Quill (a sleek silver vaporising pen), and on-demand cannabis delivery startup Eaze. It’s cannabis-meets-intentional-chic – no doubt inspired by Charbonneau’s previous role as art director at ‘slow living’ magazine Kinfolk.
Broccoli isn’t the only US-based brand using print media to curate the modern weed aesthetic: around the same time as Broccoli launched (November 2017), a New York-based competitor, Gossamer, also appeared. Its editor, Verena von Pfetten, wanted to create a magazine for ‘curious individuals who just happen to smoke weed.’ Like Broccoli, it covers all the sorts of things that might capture the imagination while high.
‘If you look at a lot of other publications’ [advertisers] it’s just like, “Here’s a shiny new extracting machine!”,’ Charbonneau says. ‘Our readers don’t care about that. They’re not buying a million-dollar weed machine.’
Broccoli and Gossamers’s readers want to find a way for cannabis use to fit into their lifestyle without having to revert back to the way they smoked the stuff when they were teenagers. Summerland is one such brand that sums up the aesthetic of the modern weed consumer.
The brand’s founder, Liam Kaczmar, makes sleek smoking paraphernalia from his home and studio in San Francisco. The ceramic bongs don’t look out of place in the homewares stores they are stocked in.
‘I was living on Haight Street, San Francisco, where the hippy revolution started,’ he says. ‘It’s littered with head shops – the place to go if you want to buy a bong. It was very bro-y, dorm room-y; not appealing at all,’ Kaczmar explains. ‘It sparked an idea: no one’s making a nice clean bong you would be happy to have just as a decoration in your home. That was the main inspiration.’
Making the product has been straightforward – Kaczmar 3D-prints moulds of his designs before taking them to local ceramic workshops to make them up – but trying to expand his business is not.
Selling online comes with its problems. He can’t advertise online which makes it difficult to reach customers beyond those already in the market for a high-end bong. He also can’t make any mention of cannabis on his website, which states that the bongs are for use with tobacco, otherwise his payment providers could refuse to work with him (see box, p.63). He’s even been unable to set up a business bank account because of the nature of his products.
Getting some more high-volume clients on board would help, but even that is tricky. He says he’s had discussions with Urban Outfitters, who eventually declined placing an order with him. ‘They weren’t really sure how to sell us with their banking partners. Hopefully the conversation continues,’ he says.
For now, Kaczmar’s business is split equally between direct-to-consumer orders through his website and small wholesalers. Despite the roadblocks, the nature of his products has generated a good amount of press interest, and boutiques and weed-specific stores like Tokyo Smoke and Mister Green in the US stock his products. He has also found that, beyond the US, his bongs sell well online.
‘We have a lot of interest in Australia, South America, the UK,’ he says. ‘I would love to sell to the Japanese market, but it’s just not even part of their culture. It’s like the world isn’t fully awakened yet. It’s starting in North America and spreading from there.’
Over time, business in Kaczmar’s home market should become easier. ‘We believe further US decriminalisation of cannabis including for recreational use is very likely,’ Wall Street analyst Nik Modi stated in RBC’s August client note. ‘It ultimately starts with US voters who across demographics are supportive of cannabis legalisation.’
In a recent poll, 83% of US citizens said they would support some form of marijuana legalisation – it won’t be long until the country, and many others, follow in Canada’s footsteps.