The tricky reality of expanding a cannabis brand into new states

Cannabis brand veterans know that expanding into new states is an ordeal fraught with difficulties that conventional companies don’t even have to consider. For at least five years, companies have been trying to execute these moves and there’s still no playbook on how to do it right.

Federal reform, which appears to be gaining support in Washington, could quickly normalize the industry’s growth. And there have been discussions between states about allowing interstate trade on a limited basis. But for now, brands with national ambitions have two options, both of them fraught with risk: They can either reproduce their operations and apply for licensure in each new target state or they can partner with a company which is already established in the new market. 

The former path allows companies to maintain control of their operations and brand, but tends to be expensive. Each new market requires them to navigate a new set of licensure requirements, and, if they’re approved, they have to spend money to build a new factory, hire a team, and on countless other expenditures.

The second option requires a company to entrust a partner with its intellectual property, reputation, and other assets. While no one tracks how many companies have made these arrangements or how they typically perform, lawsuits attest to how they can go very wrong.

Brands have accused their partners of failing to make required payments, stealing their intellectual property and using it to develop competing products, and underselling their partners. For a company trying to establish itself in a new market, these issues can stain its reputation and drain its coffers. 

Finding the right partner

Professionalism within the industry has come a long way in recent years, but out-of-state expansions can still create complications. Executives say the most important part of a successful partnership is finding the right partner.

Bob Eschino, co-founder of MC Brands, which merged its Incredibles edibles brand with Green Thumb Industries in 2019 and subsequently developed a new portfolio of brands, said that as he looks for partners, he prioritizes companies that “want to help patients and understand this is a compliance business first.” 

“We can teach you how to do the manufacturing,” but not the culture fit, he said. “I don’t want to work with anyone who will tarnish what we’ve created.” 

“Do not be distracted by a pretty facility or someone who says they have it all taken care of,” says Scott Jennings, a Wall Street veteran who’s now CEO edibles brand Pantry Food Co. “You want someone who can communicate with you, problem solve together, help put out fires and keep moving the ball forward.” 

He compared these deals for setting sail together into the ocean. “The one thing you can be assured of is nothing’s going to go 100% according to plan.”  

One of the challenges for companies seeking partners is the conflict of interest inherent to these deals. The companies willing to produce another brand’s products often have excess capacity in their factories that they’d like to use. But if their own brand takes off, they may lose interest in manufacturing their partner’s products, and paying their partner’s fees. Producing their own product is generally more profitable. 

One way Jennings likes to address this issue is by asking in advance how a partner would deal with it and gauging their response. 

Another way for a brand to protect itself, Jennings says, is by creating “stickier” or “more holistic” relationships with its partners. Rather than simply agree for a partner to manufacture his products, he can offer to help his partner with product development, or invest in a partner’s kitchen build-out. In the latter case, if a partner decides to back out, they could lose their kitchen equipment. 

Jennings says he likes to develop similarly “sticky” relationships with dispensaries to ensure they support and promote Pantry sales. (Pantry is based in California and its products will soon be available in Colorado and Canada.)

The co-packing option

In Colorado, Pantry sidestepped the manufacturer conflict of interest by partnering with Wht Lbl, a white-label manufacturer or “co-packer” that doesn’t develop its own brands. Based in Boulder and also operating in Ohio and Oregon, Wht Lbl manufactures products, including vape pens, candy, tinctures, and intimate lubes. Co-founder Jill Lamoureux said the company has two types of clients: the ones who want to join a new state market and companies that just want to be brands and let someone else handle production.

Brands seeking to expand to a new state typically have extensive SOPs and intellectual property requirements that their partners agree to adopt. However, Wht Lbl’s Lamoureux said the company can add value through its familiarity with each market. Existing SOPs won’t necessarily account for a new state’s packaging requirements, for example, and can benefit from the expertise of manufacturers who know the state. 

Reaching store shelves can be a challenge when a company enters a new market. The dynamic can also create friction between partners, since it’s often in the manufacturer’s interest to promote its own brands. 

By not producing its own brands, Wht Lbl says it avoids this conflict. Instead it presents dispensaries with a catalog of its clients’ products. Rather than all of the separate brands approaching pot shops separately, Wht Lbl offers retailers a way to deal with numerous brands through one trusted intermediary. Lamoureux said Wht Lbl offers pot shops “one throat to choke” or, more nicely, “one face to embrace.” 

“We ran dispensaries and know their pain points,” Lamoureux said. 

Wht Lbl’s offering can also be beneficial for dealing with industry-hated tax rule 280E, she said, since Wht Lbl can deduct its cost of goods sold and its clients can deduct their sales and marketing expenses. “I think there will be more and more companies like us, it just makes logical sense,” Lamoureux said. 

Some co-packers have also emerged to cater to the specific needs of infused-beverage brands. Producing and bottling beverages requires a different skill set that is foreign to many contract manufacturers. Matt Hawes, founder and president of Novel Beverage Co. a cannabis beverage co-packer based in Maine, said the company also handles distribution, a potential headache for brands since the industry’s existing infrastructure often isn’t well-equipped to handle heavier products that take up more space than flower or traditional edibles. 

An industry of magpies

Nancy Whiteman, CEO of Wana Brands, an edibles company with products available in 11 states and Canada, emphasized that companies still need to reckon with the differences between state markets. 

When she considers a new state, she looks at factors like total population, what products are allowed — some states don’t allow edibles — or in the case of medical only states, what conditions allow someone to access product. “You have to support them so differently,” she said.

It’s also important for companies not to stretch themselves too thin by entering too many states. “We’re an Industry of magpies. We all go after the next shiny thing we see,” Whiteman said. “You have to choose and then focus.” 

In some of the company’s earlier deals, Wana’s partners agreed to handle manufacturing, sales and marketing. As a result Wana didn’t always have a “visceral connection” to the market, Whiteman says and couldn’t respond to fluctuations as quickly as they would have liked. For example, without their own people on the ground it could be difficult to tell whether they should be spending more or differently on marketing. 

When a partner handles everything “It is harder to have a sense of what’s happening,” with regard to competition, prices and new products, Whiteman said. Now Wana often deploys its own sales teams when they’re preparing to launch in a new state. They also hire full-time brand ambassadors who become “the face of Wana in that marketplace” while also serving as its “eyes and ears” in the area. 

“We do a lot of reconnaissance around,” before entering a new state, said Brian Jansen, Chief Operating Officer of BellRock Brands. They analyze, among other things, the SKUs and brands that are already available. “You really have to get boots on the ground.”

Like other executives, Whiteman said the most important part of expanding into a new market is finding a partner who shares your values and high integrity. “Where there is trust, all things are possible,” she said.