A new age of infused-beverages has arrived courtesy of advances in emulsion technologies that have unleashed the imaginations of beverage-makers far and wide. Most of the sub-categories in the sector already teem with brands with more arriving every day, and entrepreneurs now offer infused-beverages that mimic alcoholic counterparts without the hangover. Darnell Smith, the founder of Mill Valley, California-based MXXN (pronounced Moon), has gone one step farther by creating one-to-one replacements for traditional spirits that target a single but vast market – the universal institution known as cocktail culture.
MXXN currently produces three SKUs that replace gin, bourbon, and tequila with the corresponding London Dry, Kentucky Oak, and Jalisco Agave, with more flavors and form factors on the way. Currently offered only in sleek black 750ml bottles that contain 100mg THC, these non-alcoholic spirits are available in California via delivery and will soon be in select dispensaries. A veteran of the spirits industry as well as a former athlete, Smith spoke recently with CBE about his shift into cannabis and the challenges that come with starting a new beverage company.
“I’ve spent a large portion of the last two decades working across a number of highly regulated industries, from pharma, life sciences, financial services, but most importantly spirits, which is where I got my start in highly regulated industries,” he said during a recent call. “I started on the agency side, working in commercialization, what today is known as shopper marketing, where the rubber hits the road for consumers, and both on-premises – bars and restaurants – and off-premises – liquor stores, convenience stores, anywhere you can find product. From there, I got involved in full-term innovation for spirits under some very well-known trademarks, including Guinness, Smirnoff, Crown Royal, Jose Cuervo. The list goes on and on of projects I worked on, and I really got exposure to what it truly takes to bring a new beverage to market.
“Through that,” he added, “I got a lot of visibility into data and where trends are going in terms of consumption, and I think it’s no secret that Gen Z and millennials have embraced this idea of mindful consumption. I think the spirits companies understand that and it’s why you’ve seen the rise of more functional alcohol beverages, and you’re starting to see things come to market. But for me personally, five years into working in the space, to be completely honest my liver was like, ‘It’s either you or me here but something’s got to give.’ So, I started making a tincture. I would decarb some flower and soak it in a high-proof spirit and strain it a month later. Then I’d be the guy in the bar saying, ‘Hey, can I get a tonic and lime,’ and I would put a few drops of tincture into my tonic and lime, and I’d be sessioning cocktails right along with everyone else.”
I asked if he had dabbled in home grow before making his own tinctures. “I was always a student of the plant, even before I was a consumer of it,” he said. “To be honest, I started using cannabis for pain relief. I was an athlete, and the options were either pain medicine or good luck you’re on your own. I wasn’t big on slamming pain meds all day, so I started exploring cannabis and that’s when I started to dig into what the effects of cannabis could be, especially on recovery or pain relief, and that’s really what sparked my interest.
“It took a while for me to get my recipe right,” he added, “but it was all driven by this thing of what cannabis has to offer, and as I age, alcohol is becoming more and more something that does not fit with my chemical makeup as much as it used to. And while I spent some time getting my tincture recipe to where I wanted it, that really is what allowed me to continue to participate in the industry. This is 15 years ago in New York City, and it just gave me another outlet to kind of remain part of the occasion but do it in my way. That was the whole impetus behind it, and since then, it’s always been something in the back of my mind, like, ‘Wow, it would be great if I could commercialize this somehow.’ But to be honest, the technology to do a water-soluble cannabis emulsion did not exist back then, nor did the rise of nonalcoholic spirits.”
The learning curve was not only not in vain, but it was also beneficial. “What makes us different is that this is not something that we dreamed up overnight,” said Smith. “Thankfully, things have progressed to a point where there was something worth commercializing that fills a very specific need in the market, and it’s this desire to reduce alcohol consumption but not to lose the social aspect of cocktails, and that’s really where this this came from. I think the way we approach it is a bit different than others. I think at some point we’re going to reach a saturation point of how many seltzer-type cannabis beverages can exist in a small market, and I think it’s incumbent upon folks to start innovating a bit in terms of what’s available. That’s where we land. The one-to-one analogous replacement for a spirit that you already know and love, or have experience with, is what differentiates us.”
The directness of the product also sets it apart, said Smith. “We’re very overt in the fact that we have a gin alternative, a tequila alternative, and a bourbon alternative that is, sans the alcohol, infused with cannabis,” he noted. “I think most other folks on the market are either doing ready-to-drink products – and everyone has a personal preference, but they don’t really do it for me – or trying to create a whole new vernacular around what they’re doing, which was also something I didn’t think, given the size and the resources of our space, was something that I wanted to necessarily approach.
“That’s why we wanted to do something that was familiar,” he continued. “So, when I’m talking to someone, I’m like, ‘Have you ever had a bottle of tequila in your possession?’ They’re like, ‘Yep.’ ‘All right, take this and do everything you would do with that bottle of tequila and call me in a couple of weeks and tell me what you think.’ And to a person, it’s been mind-blowing. How could this happen? And it’s all because of how we approached it, through the universal versus trying to make something out of a bottle be something that is not recognizable.”
I asked Smith if MXXN is intended for and marketed to alcohol drinkers, cannabis lovers who also like to drink, or both. “At our base level, it’s for any craft cocktail lover,” he said. “If you are alc, non-alc, or a cannabis lover, we feel like this should have a place on your bar cart as an option. That’s at a ground level, how we approach our total addressable market. But people come in many different flavors. Some people come in, ‘I love alcohol, but it just doesn’t agree with me anymore.’ There are some folks that come in, ‘I need something to help me get away from alcohol.’ There are folks that never really enjoyed alcohol and are impressed that now they have something that they can consume in a way that’s more discreet, that’s more socially acceptable. And so, the flavor in which people come to us is very broad, but our lowest denominator is to just start with the craft cocktail culture and make our place there.”
MXXN will continue to be sold directly to consumers, of course, but shouldn’t these alternative spirits also be available in every bar and lounge in America and beyond? “That’s what we think,” said Smith. “You nailed what we think, but in the interim we have to play on the playing field we have. You’re right, we did our whole pilot launch direct-to-consumer, because if you think about new innovations and the gatekeepers to how those get to market, what has luckily happened over time is that the success of direct-to-consumer can allow you to test your concept without the gatekeeper. I didn’t have to spend a bunch of time convincing dispensary buyers in California that this was a good idea. Instead, I went straight to consumers and gave them an experience that they’re used to – similar to buying a spirit off of Drizly and getting it delivered to your door – and proved the concept. And now when we go to retail, it is a very easy story. Yes, we developed this. Yes, we have quite a bit of traction. Yes, we can help you drive a new consumer into your store. That’s a pretty neat story.”
Courting the Canna-Curious
I asked Smith how it is going with deliveries and when he expects to be on dispensary shelves. “So far, it’s going great,” he said. “We sold out entire pilot production in less than a couple months only using direct-to-consumer. What that looks like is essentially, if you go on our site, put stuff in your cart, your address determines whether or not you’re available for delivery. Currently, we have about 85 percent of the state [covered]. There are some spots that we don’t cover that are kind of desolate, but for 85 percent of the population, you can get it delivered within 24 hours, and it looks just like any other delivery. A driver shows up with the product. Because it’s cannabis obviously the whole banking stuff does affect it at some point, so the delivery has to be cash, but it’s about the same as you would expect from am UberEATS or wherever else you order.
“We’ve just started our push for retail,” he added. “In California, there are about 1100 retailers, of which maybe 150 of them probably fit our aesthetic and fit the understanding of the consumer that we’re trying to approach at this point, I think that number will grow, but we’re starting our focus with those entities that get this new line of beverage. And also, it doesn’t hurt if they are attached to or affiliated with a consumption lounge, because once they understand how it could work in a consumption lounge, it’s kind of a no-brainer.”
Regarding production, “We produce the lot of our product just outside of Sacramento now,” said Smith. “We are exploring manufacturing capabilities through another copacker in Southern California that will help us save on shipping costs and things like that as we move product around the state. From a dispensary standpoint, you’ll start to see us in select retailers near the end of July in both NorCal and SoCal.”
The select nature of these retailers is anything but arbitrary, he explained. “A store has to have certain KPIs (Key Performance Indicators) for us to consider them. You have to understand beverage and you have to have a beverage portfolio that you sell. You have to have the aesthetic that matches what we’re doing. We’re a higher price product, so there are some stores that just aesthetically we don’t have any interest in. It’s partly merchandising, how they set up the store, and it’s also about the consumer that they serve. If you’re a dispensary and you don’t have an influx of what we call the canna-curious or those that are newer to the space, then this might be a tough sell. Because legacy consumers, which is what the industry terms them as, the more high-dose consumers, have different expectations in terms of product strength, and we don’t have an offering for that segment as of yet. We will, but knowing where we’re starting, you have to have enough traffic of canna-curious folks that are coming into the store.
“For us, luckily, a lot of these low-dose seltzer beverages have already kind of mapped out the locations that have that demand,” he added. “Cann has done a great job of being focused on their retail strategy. You can pretty much look where they are, provided they have a higher-end consumer, and that’s somewhere we’d be interested in being.”
So, is it a discriminating consumer that he is going after, or is there room in there for levels of connoisseurship? “I think there’s certainly room for levels, but our core target is going to have an appreciation for what else is in the bottle in addition to cannabis,” said Smith. “What you see in the market right now are two types of methods going. In some areas, consumers are one thousand percent price conscious, and no matter what the product is they’re doing the math per milligram of THC, which for us completely devalues the rest of the technology in the bottle. We look for a consumer that can go beyond price-per-milligram and understand that there’s value in the other stuff in the package, which is a little bit of a different approach.
“I think over time that will sort itself out,” he added. “I think our biggest thing is once we get liquid to lips, it pretty much speaks for itself. We don’t do a lot of selling. The hardest part is how siloed everything is and getting the product efficiently to folks where they want it, but we’ll overcome that over time as legislation continues to evolve, especially as we look beyond California and a multi-state approach.”
Did Smith have a game plan for that expansion? Some companies want more control as they move state to state so they spend more on infrastructure, while others may want more speed to market and partner with established licensees; for some, every state is different. “I’m talking to folks in the industry about how they did it,” he said, reeling off the names of several large brands with whom he has had conversations. “I’ve been lucky to be put in touch with brand MSOs, and I’m getting a feel for the different ways to do it. I think, for us, we’re going to be somewhat of a hybrid depending upon where we’re at. At a baseline, we are a beverage IP company, and you’ll start to see many more offerings come from us over time that hit different parts of the market. That’s first and foremost, but in markets where it’s advantageous for us to potentially verticalize, we will.
“California is ripe for that given how siloed it is and also given the economic environment, which is weeding out a lot of players that maybe didn’t have the most solid footing to begin with,” he added. “Our initial distributor just went out of business. For us, it’s really a market-by-market view, but generally we approach it as an IP company with trade secrets and trademarks and IP. What I’ve learned is the more you can control the less chance you have for error.”
Some brands start their own distribution company in order to have some control over whether they get on the shelves, which has to be a priority for any brand. “And right after this call I have a call with a collective of brands that are grappling with the same thing,” said Smith. “Do we get into distribution and even manufacturing on our own? Do we set it up through a separate entity? And there are some pretty large brands that are thinking that way, but we’re pretty fluid and I think the easiest market entry for us is always going to be IP-led. We’ve talked to several non-brand MSOs about what it would look like to go across their current footprint, and those conversations are still in play. There are single state operators that we’ve had some pretty in-depth conversations with about specific states, and there is obviously the brand MSO approach that we just talked about. So, all this stuff is in play.
“What I can tell you is we are not going to get out over our skis, and that’s half the problem,” he said. “The impetus to grow sometimes has brands make decisions that they would not otherwise make. And if you can have a little bit of patience, if things sort themselves out, especially with this upcoming economic downturn, you might find yourself in a good position. I’m an investor across multiple categories of beverage, and I see the issues that other non-cannabis infused beverages have, and those haven’t even hit us yet. They will, once things open up more, and so I’m already planning for what does it look like when that happens?”
I noted that I had just heard CNBC’s Jim Cramer talk about the two massive and totally separate distribution networks in the country that don’t talk to one another; one goes to big box stores and grocery stores, and the other goes to restaurants, bars, places like that. Was MXXN positioned to take advantage of each?
“Correct,” said Smith. “That’s an advantage I probably have over most of my peers in the sense of where I came from. I have relationships with these distributors you speak of, and they ask me all the time what’s happening, keeping a pulse out there. Obviously, they see it and they’re interested, and even the big strategics that I’ve done work for and that I still do work for are all very interested. It’s just a matter of when does legislation happen that gets them comfortable. Some of them, like Constellation, have already shot an arrow, and I can tell you the other ones are not sitting by idly. That’s what I can say on that.”
Start Low and Go Slow
I asked Smith where the infused beverage product market is in terms of being a really consistent product, noting that it took a long time for edibles in general to lose their cannabis taste, get their dosing under control, and become more consistent.
“I think it learned from the edible space, and luckily you have manufacturers out there who do cannabis emulsion,” he replied. “Vertosa and SoRSE are just a couple that have created a product that can be much more predictable and have much more uniformity throughout the product. In the past, before nano-emulsion technology really took off, you had this inconsistency. So, you might get a 100-milligram bar or candy but throughout the candy there were pockets of higher-concentrated THC than in other parts, and so you would eat one piece – ‘this is fine’ – and then eat another piece and you’d be on the floor. The rise of water-soluble cannabis emulsion was a game changer for beverage because now it allows you to provide a product that is pretty consistent and predictable in terms of dosage down to the point where we’re able to dose the product anywhere between two and six milligrams pretty accurately. If you’re pouring a half ounce of our liquid, that’s two milligrams, up to an ounce and a half, which will give you six milligrams, which in the past was unheard of. You couldn’t be that precise, so I think the rise of this nano-emulsion technology and technologies that are forthcoming are continuing to improve on that whole piece.”
Isn’t the entire sector a learning curve for consumers, businesses, and emulsion companies? “We have much more experience with alcohol as a whole, but people forget that alcohol also treats everyone differently,” said Smith. “Some people have a wooden leg and can pour it in and not be affected; some people take one drink and feel ill. I think we’ve had a lot of time since prohibition as a general population to understand the different effects. I think cannabis is still in its infancy as it relates to mass market, and so that’s our whole thing in terms of start low and go slow.”
In light of all of this, is it important in the infused-beverage space to be first to market with a product like this, or will quality win out in this increasingly crowded segment?
“I think it’s not an ‘or’ but an ‘and,”” said Smith. “There is some benefit to having first-mover characteristics, which the players that are in the space now will have. But ultimately, longevity and success are going to come down to the product that you’re delivering. So, as an investor – because a lot of these brands have actually approached me to invest in them as well, even as a competitor – what I tell them all as I’m looking through their approach is, are you set up for longevity, because we’re at a point where we’re still so early in this whole arc of this specific space that if you come out of the gate too fast and too hot and you can’t survive economic downturns and changing regulation, you’re going to be out of business before you know it. And unfortunately, by the end of this year, I guarantee you, you’ll see some beverages fall by the wayside.
“More important than first mover and equally as important as the product you deliver,” he continued, “is how you’re setting up your business to be resilient and thrive during times of ups and downs. Because what I can tell you, and what spirits has perfected, is it is one of the most resilient spaces, period. People drink when times are good, people drink when times are bad, and it’s very insulated from economic shifts. I think cannabis isn’t there yet, because it doesn’t have the scale that the spirits industry has, it doesn’t have the path to market that the spirits industry has. And so, as a brand, you’ve got to take that into account, you’ve got to know what you’re getting into, and know that if your business plan says you have to be x within 12 months, you might want to slow your rollout a bit, because this space is still evolving.
“So. that that’s how I look at it,” he concluded. “Yes, I’m glad we’re one of the first in the space, but I’m gladder that we have the best-product on the market, and I’m even happier that we have a setup that’s going to allow us to exist to all the ups and downs. And that was big for me as I was doing this. I learned that from doing Mojo PSG, and understanding what industries were resilient and focusing our activities on those spaces, and really being able to weather downturns and upturns., We didn’t lay off one person During COVID; in fact, we were hiring. It’s about understanding where resilience is and where it isn’t, and as a brand, especially in the cannabis space, you’re going to have to pay attention to that sooner or later or it’s going to bite you.”
I asked Smith what specifically was putting the most pressure on companies – taxes, tightening of credit, distribution – and if he thought a possible recession would have an impact. “I do,” he said. “Access to capital is always an issue, and I think a lot of brands are in constant money-raising mode, and that happens when capital markets tighten, which is what we’re experiencing now. That’s one piece of it, and it requires some savvy and some discipline when it comes to how you even manufacture. The age of having pallets and pallets of products sitting around – you can’t do that. You have to have some strategic planning about how you roll-out manufacturing. It’s why we did a pilot run. I didn’t go out and produce a million units off the bat because I knew what was coming.
“But lo and behold, if I go to any distro and look around, I see pallets and pallets and pallets sitting around,” he added. “Part of it is due to the structure of the industry and the lack of copackers out there, which means in order to get attention, in order to get online, you’ve got to do bigger runs. There’s all that stuff that brands, but beverage brands especially, deal with, and I think just from prudent business practices, it’s easy to get out of balance. And as you mentioned, the changing distribution landscape is always something you have to pay attention to, and a lot of people get caught out there. This one distributor going down took a lot of beverage product with it that brands just lost. You have to be prepared for that, and it is it is not going to be easy. It’s easy to create a brand, it’s easy to get a little bit of buzz, it’s easy to get on a few shelves and start, but that’s not even a tenth of the battle that’s coming.”
As far as the challenges MXXN itself is facing, “It’s what we talked about,” said Smith. “It’s the reliable route to market for beverage. I don’t think many of the distributors who are in existence now have a ton of experience with beverage. The weight of it, the size of it, the space it takes up; it’s just a whole different thing versus distributing flower or gummies, which weigh a tenth of what beverage weighs and has the same margin in some instances. I think the limited number of lines that are available to produce beverage is a limiting factor that you got to work around, especially in a state like California, and that goes to production, planning, and understanding what you need when and where. And I think the tightening consumer belt is going to be here for a bit.”
That does speak to the MXXN price point – $80 retail – as well as the one form factor. Is a smaller version in the works? “We have a two-ounce bottle – we call it the airplane bottle – that’s coming out on this next run,” said Smith. “That gets us into a different market in terms of trial, which is our biggest thing. But again, I have to rest on the resilience of the spirits industry.”
Beyond the Dispensary
I returned to the idea that this is a product that is not necessarily a natural fit for a dispensary. It can target anyone – athletes, law enforcement, veterans, anyone who drinks too much – going way beyond a lot of the people who step into a dispensary. “Yes, that is the truth,” said Smith. “And it’s why we have to be ready to exist until those waves change, and we know they’re going to change. It’s just at what velocity is that change happening, and so you need to plan for worst-case scenarios.
“We’re looking 5-10 years out and what is this going to look like,” he added, “but I can tell you, in places like New York, I already hear rumblings amongst my connections as it relates to bar owners and things like that. They are a little bit coming together on this [idea of] consumption lounges, which have been written into the legislation in New York. They’re like, ‘For beverages, we want equal access. Why can’t someone enjoy this in a bar establishment as well? Why is ii confined to consumption lounges?’ I think those fights are going to happen on multiple fronts, and quite honestly, when the rules were being written, no one could even think of a product like this. And now that it’s here, that’s the first thing I hear the most from experienced people: ‘Wow, your product has application well beyond that.’”
Was New York a priority as far as gaining a foothold for MXXN? “Number one on the list for sure,” said Smith. “No qualms about that, and I think if you asked the folks at Cann, I know it is for them, too. But there are other states that for us have even another piece on top of it, like the limitations on how much you can have in an individual package. The form factor for our 750ml has 100-milligrams, and in several states beverage and other edibles are capped at 10-milligrams per package. So, we’re fighting that fight, because again, people couldn’t envision a product like this before they could see it. But here it is, and now there’s going to have to be some work to get people to see the light. At the same time, we can’t depend on them, which is why we’re coming out with a smaller format.”
So, could you potentially go to a copacker and say, ‘Look, we’re going to have to come out of the gate in this state with smaller form factors that are 10 milligrams each? “Massachusetts is a perfect example of that,” replied Smith. “They’re clamoring for it, but I’m like, ‘Guys, it’s a different form factor there.’ They’ll have to wait until the two-ounces comes out, which luckily for them is not long from now. But I have those conversations all the time, and it really does help drive our roadmap about what states are a priority. I dig a little bit deeper, too. I have data about how spirits consumption is going in these states, and I really like the states that have historically had a high consumption rate of spirits, but you can see it waning. That’s just opportunity.”
Is there something Smith is looking for right now? Partners? Capital? “Definitely partnerships,’ he said. “We entertain ideas for that all the time, we come up with ideas about ways to get economies of scale to complimentary products. As it relates to capital, we’re in a lucky position that while we want to bring in the right capital and partners, we’re not dependent on it, whereas quite a few of the others, without it, they will perish. For us, that is not the case, and that was somewhat by design. It’s kind of how you said a bunch of things came together for me at once for this to come to fruition, and so, I’m going to be here, and we’re going to run this at the speed that makes sense.
“There’s a lot of pressure that comes when you take on a bunch of capital in terms of how you move,” he added, “and so, we have a very strong litmus test on anyone who wants to invest in it so that they have to align with our views on the long game. And unfortunately, a lot of VCs have formulas, they have their things that they have to adhere to. I’ve had conversations with several of them, and they’re dying to get in, but we just can’t reach agreement on what it looks like. It’s hard for them to accept that I’m not pressed, because that’s not a normal response, but the reality is, I don’t need it. I would welcome it for the right partner, but we don’t need it.”
And when will we see a new spirit category from MXXN? “Our rum alternative is 99 percent of the way there,” said Smith, “and I think you’ll be excited about what our roadmap looks like.
“This is going to be more of a white rum,” he added, when asked. “If you think about us, we don’t go out say you should drink this neat, because it doesn’t have the same characteristics that ethanol is going to provide you mid-palate to finish. Our whole move is the vessel is the cocktail, and we can easily look at what cocktails are flying right now, and that list doesn’t change as much as people think. So, the daiquiris and the rum runners and the cocktails that are historically at the top of the list, that’s where we’re going next.”
Indeed, the recipes page on their website includes MXXN-made martinis, margaritas, and even a cucumber crush, to name a few. But what about someone like my father, who only drank Scotch, usually on the rocks. “I’m a consumer as well, so I’m clear that that is not the target,” said Smith. “It’s really this craft cocktail culture.
“When you’re drinking a spirit – and most people don’t realize this – what you’re really looking for at the core of it is the ethanol, and the flavor notes are just complimentary to that,” he added. “That’s some of the learning I had even in my innovation days in spirits. We know that, and whether someone does it neat or with a little water, or if they do it on the rocks, that tells you something different. We thought about all those things as we were doing this, and it’s funny you asked that because in the initial concept of what we were doing, we were coming at it wrong. We were trying to fully mimic what you taste in a bottle as it comes to a spirit, and what we realized was we weren’t positioning ourselves as a neat play. Although I will tell you, more people than I would have imagined drink this stuff neat. I do, too, but the point is that we had to take a step back and think about it through the lens of a cocktail as far as how we developed our flavor system and how we approached the distillation of certain things. What was it going to taste like in the glass, but we’re clear about that now?
Our time winding down, I wanted to end on how the experience in cannabis had affected Smith thus far. The effort appeared to encompass so many experiences and skill sets from his life, and the way he talked about bringing the long view and being prepared for whatever comes, made it seem as challenging as it was satisfying.
“Oh, totally,” agreed Smith, “and especially when I talk to some peers, and you know, it’s just a different approach. And I’m not doing this to survive. What I mean is, some people are trying to make a living in today’s environment doing this. That’s tough now. Give it a few years. But we’re at a point in its inflection that it just requires a lot of grit and a lot of ability to withstand some things that are going to go wrong. It’s just inevitable based on how the industry is structured.
“And I’m hopeful,” he added. “I’m a big supporter of cannabis beverages, and I want to see as many of them survive as possible, and I try to instill this in as many people as I can in terms of how to approach this business. I don’t even look at other cannabis beverages as competitors, to be honest, because we’re all so infinitesimal compared to where we’re trying to go. We need to collaborate, and we need to collectively put our energy into showing people that there is an alternative that we want you to try and may the best product win. But until we start thinking like that, the speed of this move is going to be slowed, so my hope is that they will get their heads around that, category-wise.”
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