For entrepreneurs who want to get into the cannabis industry, edibles is a growing category that could be a viable option. In recent years, edibles and topicals have seen little price change, and while growth hasn’t skyrocketed, it has been steady based on data from BDS Analytics.
Edibles sales in Arizona, California, Colorado, and Oregon have a market share of 15% so far in 2018 (flower and concentrates have the highest market shares). Across all states tracked in the BDS Analytics report, candy is the most popular edible cannabis product, but chocolates, tinctures, and infused foods are also popular.
In other words, there are many viable opportunities to join the cannabis edibles market, but entrepreneurs will face challenges along the way. Let’s take a closer look at what it takes to succeed in the cannabis edibles market.
1. Market Research
Before you start a business in any industry, you should conduct market research, and the cannabis industry is no different. By identifying problems and providing solutions with innovative edibles products, an entrepreneur has a much better chance of succeeding in the cannabis edibles market.
Mark Grindeland, CEO of Coda Signature, the number one manufacturer of cannabis-infused edibles by market share according to BDS Analytics, explains how his company got started in the edibles industry just three years ago saying, “We did a ton of market research! We visited testing labs and dispensaries and learned what problems they had. We listened and developed products and processes that solved those problems.”
2. The Right Team
Having people with the right skills and knowledge in place is critical to a company’s success. For Coda Signature, this involved hiring a classically trained chocolatier as the Head of Edibles and a third generation confectionary company veteran as the Chief Operating Officer. Grindeland also recommends hiring people with a management background who have the ability to raise significant capital so the company can scale.
As more states release regulations that require testing of marijuana products, edibles manufacturers that have stringent testing procedures in place are positioned to benefit. “There were tons of infused products in California until the state started requiring lab testing this summer,” explains Grindeland. “At that point, many companies closed because they didn’t have the money to start testing.”
Therefore, it’s critical that testing is prioritized from the start. “Before we launched Coda Signature, we did internal testing and worked with people who have science backgrounds,” shares Grindeland. “We spent time with testing labs before we launched our first product and hired a Chief Compliance Officer on day one. To this day, Coda Signature hasn’t failed a single lab test on any of our products, which is very rare.”
4. Standard Operating Procedures
According to Grindeland, written procedures for testing, manufacturing, and so on are essential to a successful cannabis edibles company. These procedures need to be changeable as regulations in the cannabis industry change, which means the company needs to fully understand those regulations and be able to adapt to them (see #6 below for more details about being flexible).
Grindeland says capitalization is important to a cannabis edibles company for a variety of reasons, but two of those reasons are crucial: to withstand regulatory changes and to position the company for merger or acquisition.
This is an industry where things will change. As discussed in #3 above, when testing became a requirement in California, many edibles companies had to close their doors because they couldn’t afford to build the necessary procedures into their operations. If a company has enough access to capital, it can weather the storms of regulatory change or other unexpected challenges.
In addition, for companies that hope to be acquired by a larger company in the future, one of the first things potential acquirers will look at is whether or not the company is well-capitalized. No company wants to purchase another company that will be nothing but a drain on capital.
As mentioned previously, the cannabis industry is one that changes constantly, and a cannabis edibles company must be capable of navigating through those changes or it will fail. “You have to know change is going to happen because laws are still being developed,” says Grindeland. Be nimble and be willing to pivot. You also need people with startup experience who are able to work in that kind of environment.”
7. Forward Thinking Leadership
“Start with the end game in mind,” says Grindeland. In other words, think about where you want your edibles company to go. Do you want to keep growing? Do you hope to sell it one day or get acquired by a larger company?
For example, if you hope to get acquired, Grindeland recommends learning how companies assess a likely candidate for acquisition. “Companies want to buy a true asset, so know the criteria they’ll look at and start to build business practices in support of your long-term exit strategy from the first day.”
8. Prepare for Challenges
Entering and staying in the cannabis edibles market isn’t always easy. Grindeland explains, “The entry cost into the edibles market is much higher today than it used to be. It’s more competitive and there is more sophistication in product development. There are also significant challenges in getting shelf space at dispensaries.” Cannabis edibles entrepreneurs will face challenges and must be prepared to overcome them.
Despite the challenges cannabis edibles companies face, there are still opportunities, particularly for innovative and niche businesses that do things better or differently than any other company. In addition to the recommendations discussed so far in this article, Grindeland offers another piece of sage advice to people thinking of starting their own cannabis edibles companies: “Stay nimble while looking at the end game.”