By all accounts the infused-beverage sector of the U.S. cannabis industry has only begun to hit its stride and should only expand in the years ahead, even if its share of cannabis sales remains relatively stable. According to the Cannabis Beverage Association, sales surged 40 percent in 2021, to $95.2 million, with THC-infused beverages slated to reach $1 billion in sales by 2025, per the Brightfield Group, but these numbers still represent a fraction of overall sales. In markets tracked by BDSA Retail Sales in 2021, for example, beverages made up 5 percent of total edibles sales, and all edibles accounted for only 15 percent of total legal sales, which were reported to be $24 billion in 2021 ($10 billion from medical and $14 billion from adult-use). That said, consumer trends are still shaking out, and infused-beverages are regularly touted as one the fastest-growing categories in cannabis.
It was into this nascent, challenging, and opportune segment that CANN co-founders Luke Anderson and Jake Bullock launched their Venice, California-based brand in 2019. clear from the beginning about the niche they wanted to exploit. Today, CANN continues to gain market share as the #1 selling THC-infused beverage across America, according to BDSA, and in terms of all-important name brand-recognition, the company and its products have succeeded in capturing the carbonated hearts of an army of dedicated celebrity fans-slash-investors. All of this as CANN continues the heavy lift of expanding nationwide and globally.
The founding of CANN is a tale of excess brought to heel, and a “very unusual story,” explained Anderson during a recent call with CBE. “Jake grew up in Colorado and witnessed cannabis legalization from a pretty early age. I did not have any experience with cannabis whatsoever. We made friends as management consultants in 2012, and we started at Bain & Company on the same day. What we had in common was that we were super-heavy drinkers.
“It was a work hard, play hard culture,” he continued. “We would be very heads-down focused on work Monday through Thursday, but then Thursday night, Friday night, Saturday night, and all of Sunday, it was just like…booze. I think we started realizing it was having a very harmful physical, emotional, and mental impact, but for me, I didn’t see a way out other than just cutting back or stopping drinking. I would do things like take 30-day breaks from alcohol, and those would make us feel really healthy, but they were not sustainable. We felt bored. We felt like we weren’t able to participate in the social routines where our friends were drinking and taking the edge off. People would ask us, ‘Why are you drinking La Croix,’ and there is a bit of a social stigma for not drinking at an event if you’re not known to be fully sober. So, Jake told me one day, ‘I think that cannabis is the answer. I think that micro-dose THC beverages are probably the future of drinking.’ I looked at him like he had three heads. I thought it was the dumbest idea ever. I’d had the bad pot brownie experience in college; one time someone told me to take a puff off a joint at a party and I coughed so hard that I became incredibly stoned and couldn’t interact with anybody; and for those reasons, I just felt like once you had a bad cannabis experience, you don’t go back.”
This was 2014, a full five years from inception. “I went to Harvard Business School from 2014 to 2016, and [Jake] went to business school at Stanford Graduate School of Business from 2016 through 2018,” said Anderson of the intervening years. “In 2018, when I was working at Bain in London, I happened to be working in a unit that helped big consumer good companies behave more like startups – getting people in a room, putting posted notes on the wall, and outlining all the work we had to do – and I began to have a little bit of impostor syndrome because I was educating these very big companies how to be a startup and I had never really been one myself.
“At the same time,” he added, “I had my first two-day hangover, which you never forget. It’s usually in your early 30s, when your body can’t process alcohol the same way it did before. I had a big Saturday night, and I was not able to work at all on Monday. I mean, I showed up, I tried, but my brain just wasn’t there, and it was the first time I had really felt a potentially devastating professional impact from my drinking choices. I was building a skill set of launching brands and products and helping innovate within large consumer goods companies, and I finally had a reason to reapproach my good friend about his genius micro-dose THC beverage idea. I reached out to him, and he said, ‘I don’t know. I was working on it as a school project, but some of my co-founders are out because it’s kind of a professional stigma to work in cannabis. At that time, there were no breakout cannabis products that had mainstream acceptance.”
Surveying beverages available at the time, a niche presented itself. “We had seen the 1.0 wave of cannabis beverages,” recalled Anderson, “and our thesis was that it’s all about microdosing. You don’t want to get super messed up off of a cannabis product. If you’re somebody who’s replacing alcohol and trying to be healthy, you’re trying to just lightly take the edge off so that you can still socialize with your friends and not feel like an idiot. So, the 100-milligram drink, obviously, is not going to do it for you.”
I mentioned that the 100mg portion was a size that Dixie, for example, was in part known for at the time. “Exactly,” said Anderson. “And they had these little caps that you could dose out five-milligram portions of it. But we’re not out there buying Robitussin and dosing that to socialize. We’re not getting Everclear and diluting it or taking tiny little shots. We’re drinking containers of beverages that we can have 3-4-5 of in one social environment. So, I think that the thesis was, let’s build that for cannabis. Nobody had ever done anything under five-milligrams, and we were aiming to be the first ever microdose THC beverage.”
I asked Anderson about the formulation process, and whether they had to go through several iterations to find the perfect dosage and tastes, a process I assumed was ongoing. “For the formulation, there are two exercises,” he explained. “One is about cannabis, and one is about everything else. The cannabis exercise, we agreed that a two-milligram THC dose was correct. Jake did some research at Stanford GSB and found that there were an equal number of people that were on the fringe of the cannabis market who felt like two-milligrams was not enough as there were people who felt like two milligrams was too much, and so that felt like the sweet spot of something you could have a few of and still feel able to socialize. So, we felt confident in the two-milligram beverage, and then I worked really hard to develop unique formulations on the non-cannabis side that were just interesting and delicious drinks.”
They launched with the thesis in mind and the formulations in play. “The lesson I learned from Bain was, let’s launch in one market with one SKU and one retailer,” said Anderson. “So, we picked L.A. and MedMen, and we put a six-pack of two of each of the three flavors that we launched with – Blood Orange Cardamom, Lemon Lavender, and Grapefruit Rosemary – in one sessionable multipack of drinks. We made 3000 drinks and we sold them all to MedMen and waited to see what happened.”
They did not have to wait long to realize their hunch had paid off. “We were the first ones to commercialize [microdosed THC beverages] in June of 2019 after raising a $1.5 million pre-seed round, and then we exploded it because it turned out that was the key that was the missing piece that would draw in consumers who were previously afraid of cannabis,” said Anderson. “One of the main things we did differently from the other products was we designed it so that it looked and felt like a true consumer packaged good, so you don’t think twice, because it just looks like a regular beverage. And from there on, it just continued to snowball and pick up momentum. We have since raised the seed round and a Series A. and we’re hoping to be the first international mainstream cannabis brand. We feel like we are the first national mainstream cannabis brand, but we aspire to be truly global.”
The CANN Difference
“We tried to optimize for purity and consistency,” said Anderson when asked about how they source their cannabis. “We use hemp isolate for the CBD, and we picked a CBD dominant ratio of four milligrams CBD to two milligrams THC. We believe in the entourage effect. We think that CBD on its own doesn’t really do anything, but when you put it with THC, you can create a really relaxing high that’s not overwhelming at all to the consumer. So, we locked that in and then found the purest distillate we could trying to get it above 90 percent. For that reason, it didn’t really matter whether it was indica or sativa, or what exactly the heritage of the cannabis plant was, because we were stripping out all the terpenes and the second order cannabinoids to create a consistent feel from THC and CBD. No matter where you were, no matter where you had your CANN, it would make you just a little bit high.”
Has that ratio remained the same to this day? “It has,” said Anderson. “We do have a Hi Boy that’s five milligrams THC and no CBD, but it’s not as popular as the small boys in their dosing integrity. Kind of a funny story. We started off with two milligrams of THC and six milligrams of CBD, but the lab came back and gave us an approval on two and four, so we had to sticker over everything, and honestly we just said, let’s just keep it there. We didn’t want to change up the dosage for the consumer, so whether it was lab error or if it was what we actually put in, we’ll never know, but it could have very easily been a two-milligram, six milligram if that first COA had come back differently.”
Regarding R&D, the founders remain hands-on. “Jake and I are very focused on product innovation, and we do a lot of it ourselves,” said Anderson. “We have a food science partner, and we actually go to Europe to research ingredients and get the non-cannabis side of things in order. Then we’ll come back to the U.S. and work with our local co-packers, because you have to have different manufacturers in every state in order to get that product compliantly produced. But we don’t rely on too many external people to research and develop the formulations for the drinks and we think the cannabis is just a simple ingredient, so it’s not like we’re doing a ton of cannabis-related research, because our target consumer really doesn’t want too much.”
The lineup now includes Lite beverages. “That gets into the non-cannabis side of things,” said Anderson. “For the drink that we made originally, the idea was, how do you make something that tastes better than a spiked seltzer and has a third of the calories, so we could market it as, ‘You’re going to have three of these, and you will feel as good about the caloric impact on your body as having just one of the most popular alcoholic beverages,’ and consumers really liked that. They said, ‘I’m skipping out on the hangover, but I’m also able to have three times as many drinks and feel like I’m being just as healthy as if I had one of the previous drinks.”
Was that line especially popular with women? “We found that it was equally popular with males and females, and we were a little surprised,” said Anderson. “We expected that the cuteness of the cans, the bright colors, the playful flavors, and the not-super-masculine brand voice would have leaned female, but in part because there are more males in the cannabis market, and I think because alcohol substitution is really a gender-neutral pain point, it was popular with everybody. The challenge there was, how do you make it taste great but also follow trends that you see, with beverages really capitalizing on premium natural grocery retailers like Erewhon or Whole Foods, and so we said, let’s devise a clean-label, limited-ingredient beverage, with no more than five types of ingredients, so you can name them all just by counting fingers on one hand.
“Let’s go juice, let’s go herb, let’s go agave nectar as a sweetener, water, and cannabis,” he added. “So, that was the set of ingredients we picked from, and then as we realized people were looking for no-added-sugar versions of the beverages we made, that stripped out the agave nectar and made a delicious tasting 10 calorie drink.”
Even the company’s Hi Boy drinks, at 5 mg THC, is considered low-dose by industry standards if not by the typical CANN consumer. “You could have 20 Hi Boys before you get to a 100-milligram drink,” noted Anderson, “People look at that and think, ‘What a low dosage,” but for our consumer, that is a higher dosage. People can’t have more than two or three Hi Boys without feeling incredibly intoxicating.”
The CANN Message
I asked Anderson how as a brand MSO it is managing its state-by-state expansion, and whether it is setting up shop itself or entering into rev-share partnerships, or some variation. “We actually did something different than most of the cannabis brands that did multistate expansion,” he said. “We wanted to have the revenue streams be non-royalty, so we will pay co-packers in each state, and we will pay distributors to move the product. We’ve got some partners that we work with in multiple states – Green Thumb Industries is one – that we have a pretty deep partnership with. But really nothing is super exclusive, and we continue to meet people in each market, build relationships, and figure out what’s the best way to get it done.” CANN products are currently available in Massachusetts, Illinois, Nevada, Arizona, and California, and recently Canada was added to the list.
I asked if the idea is that CANN not only controls as much of its destiny as possible in terms of getting on the shelves while also deriving more direct revenue? “Exactly,” said Anderson. Is that a model the company wants to replicate wherever it put its footprint down? “Correct,” he replied.
It occurred to me that CANN’s brand recognition seems to be far greater than its footprint would suggest, and I mentioned to Anderson that it is a very interesting dynamic to have the type of reputation CANN has but only be in five states, which is not to dismiss the amount of work it takes to get into five states. “It’s a good point,” he said “Beverage is a very complicated product to produce. It’s not as easy as flower, and for that reason we will continue to expand more slowly than brands in other categories. But the nationwide and in some cases global recognition that we have as a brand means that there’s untapped potential. You’re likely to want to purchase something if you see the CANN logo on it because the brand has just been out there.
“And the reason it’s out there,” he added, “is because we have 35 celebrities who have invested in our brand and who really believe that we are the global answer to an alcohol substitution and cannabis curiosity pain-point that a heavy majority of people identify with. So, they promote our product because they like us and because they want to see the value of their stock increase over time. And in a world where it’s very difficult to advertise, and cannabis brands are struggling to make ROI-positive paid-media happen, you have people with massive followings sharing willingly about our brand, and that does a tremendous service to our ability to be recognized.”
With the uneven success of celebrity-branded flower in mind, I asked Anderson if he thought celebrity collaborations make better business sense with a product like a beverage than flower?
“Two reasons,” he answered. “One, celebrities are people who appeal to the masses. They’re people who have mainstream consumers following their every move. The stoner segment of the market is a bit of a left-of-center subculture when you think about it, and they don’t play by the rules, the societal norms that have popularized celebrities. So, there’s something a little bit counterculture about flower, about most cannabis products, and for that reason, I don’t think that celebrity is something that will drive a flower consumer’s purchasing behavior. But the microdose beverage segment is by definition a mainstream American consumer problem that we’re solving, and so they will listen to celebrities, because celebrities are sharing information about something that’s generic that does not require familiarity with cannabis to understand.
“The second point is differentiation,” he added. “A celebrity could throw their name on a bottle of water, and I don’t think it would do that well. But if a celebrity throws their name on something that’s new and innovative and that feels different than what the consumer already knows, then it turns heads and it’s easier to latch on to.”
Did putting this into play take a lot of work, and did it take on a life of its own once started? “We had a strategy to try and get one of the first mainstream celebrities to endorse cannabis,” said Anderson. “Again, a non-stoner celebrity endorsement was really what we were going after, and it worked, but then more kept piling on. I built relationships with a lot of these people, and they’re betting on us as a founding team, and we see them as business partners. It’s just a big army of folks who believe in CANN and want it to be the alcohol substitute that helps normalize the plant, and I say, if you have a platform, if you have a voice, you’re welcome here.” Indeed, the brand is famous for its famous, which include Gwyneth Paltrow, Rebel Wilson, Ruby Rose, Darren Criss, Baron Davis, Tove Lo, Casey Neistat, and Bre-Z, to name a few.
And they actually become vested in the business, I asked. “Yeah, they put money in just like a VC and they own a piece of the business,” said Anderson. “And then over time, they do things and can earn more equity and can see the value of their equity increase as the business grows.”
Is CANN reaching out to other celebrities because there’s no end to the famous folk who might endorse these products, from athletes, to musicians, to actors, to politicians even. “We have some of each,” said Anderson, “and they continue to reach out to us; we’re not reaching out to anybody to recruit them; they tend to find us, and then we end up having a good conversation, and if they are in it for the right reasons, they join the team.”
CANN Expansion
Even though CANN is based in California and launched there, the state is not easy. In fact, said Anderson, “California was really hard. MedMen was easy, because it was like, ‘We’re the new normal, bringing new people into the cannabis ecosystem.’ But that brand has had its share of issues, and most of the other retailers in California have more of a dollar-per-milligram-of-THC-type of consumer base. So, it really hasn’t been that easy, and if you look at our sales [in California] versus in Illinois or Massachusetts, it’s very different.”
Does it get easier as you go east? “It gets easier with the recency of a rec legal state timeline, so this is definitely catching up,” he said. What about a state like Florida? “Florida would be great if it were recreational,” he said. “Then it would be a no brainer. It’s so big and the retiree population is probably more interested in alcohol substitution than the younger generation. So, it’s a big opportunity if we can figure it out.”
The company currently has about 40 employees, said Anderson, largely in “sales, and then some creative brand marketing folks as well.”
I asked Anderson if, as the company has gotten bigger, does it prefer to enter a new state at a certain size, with a certain amount of market share and a certain number of shelves available if not immediately, soon thereafter? Is that all a part of the thinking? “Yes, it is,” he said. “You prove the concept narrow and focused, and then once you know that the consumer wants it, it really is just about building distribution. And so, we will only enter a new state if we believe we can make a million cans in the first year.”
Are there states you’re looking at now that you prioritize? “New York and New Jersey are two very big priorities for us, because we know that in a newly recreationally legal state, we do incredibly well,” said Anderson. “If someone is going to the dispensary for the first time, the chances are they’re going to be attracted to and get joy from a canned product. In places like Colorado where it’s been legal for so long, most people know what kind of cannabis they want to buy and what gives them joy. We’re pushing an uphill battle, convincing somebody who already likes weed to think about cannabis and alcohol substitutes, and for people who live in Colorado and say they don’t like weed, it’s hard to convince them to show up to the dispensary. But you really do get a huge influx of people just checking it out right when a state becomes legal.”
Considering its intention to become an international brand, is Canada considered a stepping-stone to foreign markets, or is there another strategy to make international growth a reality?
“Canada is a test case for us,” said Anderson. “It is in some ways an unattractive market, because it’s very crowded and brands don’t even have the ability to look good on the shelf. They are strict about what types of branding is allowed, and it makes cannabis products look like they’re illicit or pharmaceutical. Not ideal. But in certain countries, like Mexico, there are regulations that suggests a product that is weak strength may be able to be sold in a Walmart, but it really depends on how regulations shake out.
“We’re getting closer and closer to this being something that is able to exist everywhere,” he added, “and people are starting to understand that low-strength THC products are objectively so much better for everybody than alcohol. So why is it that alcohol can be purchased everywhere, and there’s no child block on it, while THC products are relegated to the dispensary channel, and you have to read a manual to open them. It’s a now thing, not a forever thing, and we just need to find places where they have written regulations and built infrastructure for microdose beverages, because that’s how we’ll win.”
Is there a timeline for when CANN might expand into another country, assuming all the same challenges exist and you need to find the right beverage maker, etcetera? “I think we’ll add another country next year, potentially Mexico, but it’s a 2023 thing. The tristate area and Mexico are big priorities for us next year.”
Our time about up, I asked Anderson how many SKUs they currently have, and if we will see any new lines in the near future. “We’ve got about 20 SKUs,” he said. “The four that we just launched, our new Lite flavors – Honeydew Mint,, Cloudy Apple Rhubarb, Golden Citrus Bark, and Tangerine Hops – are delicious. We also have a massive marketing campaign that is truly omnichannel and very groundbreaking for what cannabis is allowed to do.
“In a world where you can’t do paid media,” he added, “you can get celebrities to promote it, but what we did this year is gather a group of 10 famous people to create a music video to an original song, and that song made it on New Music Friday for Spotify globally, and the fact that we have a song with our brand name in the title that has close to 300,000 plays on Spotify in one week is insane. The music video has been viewed over a million times across all social and digital channels, and the campaign has been viewed at this point over 4 million times across all the different mediums. It’s a new standard of excellence for cannabis marketing, and one of the things that gets me up out of bed every day in building this brand is redefining what’s possible for cannabis brands.”
Is there any interest in expanding your product line to include any other types of drinking or edible products? “We have the Tangerine Hops flavor lite product, which to me is like a beer substitute – add an orange slice to it, there you go,” he said. “We’ve also got apple cider vinegar in some of our formulations that are kind of like shrubs, and you’ll see us continue to push boundaries but remain in this botanical fruit herbal zone. And in some future SKUs, you’ll even see cocktail-reminiscent formulas. What would it be like if you could have something that tasted like a Negroni but had no alcohol and no sugar and no calories? That’s a new frontier that we want to explore.”
Indeed, when you start to think about the different types of alcohols there are, you theoretically could do that forever. “It never stops,” agreed Anderson. “You can continue to make new and interesting formulations. It’s like writing songs, but instead of musical notes on a page, it’s ingredients and ratios in a container.”
In February, CANN announced a “$27M Series A funding round coming from fresh institutional capital, existing investors like Imaginary Ventures doubling down, and a roster of new celebrity investors including Nina Dobrev, Adam Devine, Zoey Deutch, Jordan Cooper, Sara Foster and Rosario Dawson.”
I asked Anderson if the company will continue to seek capital as it expands. “We do have to continue to raise money in order to grow,” he said. “It’s a capital-intensive business, building infrastructure and training partners to develop the capabilities to produce our beverages. We buy all the inventory, we pay the co-packers, we commit to volume, the whole thing. It’s not super easy, and it’s not super cheap, so the challenge is continuing to perform and as the business gets more and more complex, capitalize it so that it can have the resources to continue to grow.”
Is the current economic environment creating new challenges, and what about competing pressures on pricing, especially in an inflationary environment? “We are experiencing a pinch-point in the industry right now, where everything is all out of whack,” he said. “The supply chain issues, the fact that very few cannabis operators are making any money, has caused a collective price raise that is impacting the consumer. And the tax burden on the operators is so great that it is very difficult, even in a new higher-priced environment, to out compete each other, and also the black market. So, it’s a very tough time for cannabis. We’re lucky we’re protected from it because our consumer is a little more premium. We wanted to get the price down to 18 bucks a six pack just so that people started thinking about it as like a daily drinking thing, but now we’re back in $24.”
You want to lower the price, but can’t? “Correct,” he said. “Otherwise, you’re at risk of your business imploding. So, we are trying our best, and we hope that the industry and the regulators will start to do things like safe banking or pass laws that allow for interstate commerce. Why can’t we import Nevada stuff into California? Why can’t we move California stuff into Nevada and Arizona, which would just make the industry a lot more structurally efficient. It’ll take some really savvy lobbying efforts, and eventually you’ll start to see things stabilized, but the way they are now, if I were a flower consumer, I would go to the black market.”
I noted that Anderson had mentioned what gets him up in the morning, but is there anything that keeps him up the night before? “The cannabis industry falling apart is what’s keeping me up,” he said. “It’s so difficult to watch the ebbs and flows and the overconfidence and under-performance of the overall market. Public sentiment around cannabis continues to evolve toward this place where everyone agrees it should just be legal, while the operators are so varied in sophistication and their ability to execute. We’re experiencing bubble after bubble and partners that are here today are gone tomorrow, and it’s very difficult to build lasting relationships in an industry with so many fluctuations and so much turbulence. So that’s what keeps me up at night.”
Still, CANN seems to be in a cannabis segment unique in that it’s easy to see it making the transition onto big box mainstream shelves when the time is right. “Here’s to hoping,” said Anderson.
The post CANN Co-founder Luke Anderson on Staking Claim to the Microdose Infused-Beverage Sector appeared first on Cannabis Business Executive – Cannabis and Marijuana industry news.
