CPG Before CPG
The Bengal Bite
Consumer packaged goods (CPG) are fast-moving products that consumers use frequently. Packaged foods, toothbrushes, and even alcohol all fall into this category. It’s also a term you hear thrown around a lot in cannabis, usually as a kind of shorthand for how the industry works and what’s important to look at when analyzing it.
And, usually, that leads to a discussion about how “brands win.” Do you REALLY think Crest is better than... whatever Crest competes with that I can’t even think of as I’m writing this right now? Probably not, so you intuitively recognize the power of a brand - the power of loyalty, the power of consistency, and ultimately the power of winning your hard-earned dollars. So, the reasoning goes, since cannabis is CPG, then brands win, and so now, to win in cannabis, all you have to do is find the best brands.
So, put it all together and you get the “common wisdom” that investors should:
- Look at CPG companies with the best brands,
- Find cannabis companies that look like these CPG companies - with great-looking packaging and maybe a few former CPG executives;
- Sit back and wait for the profits to roll in.
But the analogy doesn’t work, and why it doesn’t work reveals something about CPG and cannabis.
CPG wasn’t always CPG. When Coca-Cola started to grow in the early 20th century, it wasn’t through selling bottles at convenience stores - refrigeration didn’t even exist yet. It was sold in pharmacies at soda fountains, and getting the right mix of ingredients to all of these far-flung pharmacies was likely a logistical nightmare. One that Coca-Cola solved, as it likely did many other problems when it put soda into glass bottles, then cans, and then really hit it out of the park with Slushies. Coca-Cola even needed to figure out how to remove some of their key ingredients and still maintain its hold on consumers (cocaine first, and then sugar to create another juggernaut in Diet Coke).
But at some point, the ability to reliably create delicious, consistent carbonated sodas for pennies was no longer a competitive advantage for Coca-Cola - it was just table stakes, what you needed to just play the game.
The CPG can of Coke you see today on a store shelf is the last little bit of an over 100 year old huge research, marketing, production, and distribution machine. The ephemeral brand of Coca-Cola is what is valuable now - but that value was very likely in large part created by the ability of Coke to make, sell, and distribute its product so well at the start. That operations expertise did yeoman's work in building the brand, and, while it’s nowhere near as valuable today because the knowledge has democratized and become commonplace, it’s the now-invisible trestle that supported Coke’s rise.
All of that is a long way of saying that the CPG industry looks like what it does now after 100 years of development. When CPG started, you couldn’t deploy new products into the market with anywhere near the ease that you can now. Branding is always essential, but especially in CPG, where costs of goods sold (COGS) are relative pennies, and there isn’t much to be gained by further cost savings versus convincing one more person to buy. So, the fight in CPG naturally goes to marketing, branding, and a host of other important but ephemeral things - the other stuff has been largely figured out.
Cannabis is only starting as an industry - there is still much to figure out. The underlying knowledge isn’t democratized yet - because much of it hasn’t yet been created. The underlying processes to grow, dry, extract, market, sell, distribute, etc., for cannabis is different from state to state, and different companies can have wildly different capabilities. Cannabis strains aren’t standardized, and they are nowhere near as hearty as the crops other farmers grow, (which have had thousands of years of natural and artificial selection in order to create the even non-GMO crops that we know today).
Even cannabis edibles and extracts aren’t truly yet CPG products because they don’t have nearly as consistent of an underlying supply chain. You can’t call up Sysco and get 1 kilo of 90% distillate delivered to finish the brownies if you run out.
To bring it home: Kellogs doesn’t generally worry about whether they’ll have enough wheat to make the flakes or that it won’t be of the right grade or have pests. They know they can count on those amber waves being delivered to their doorstep right when they need them at some price that they can lock in by hedging agricultural futures contracts. That is far from cannabis today and likely for a number of years.
But it’s in growing cannabis flower, that the CPG analogy really falls apart because of just how significant the differences between operators can be. Good old-fashioned dried cannabis flower isn’t going away, (flower sales comprise a solid 50%+ of sales in even mature markets) despite confident predictions to the contrary.
So cannabis is absolutely like CPG - but like CPG before it was really CPG.
What did Cannabis do for Colorado Anyway?
from the bengal bite
Cannabis is today’s Wild West of politics and business - the rewards for successful pioneers are staggering, but the risks are high (pun intended), and the trail to legalization is not well-marked. Colorado, having legalized adult-use in 2012, is one of the original cannabis pioneer states. What lessons does it hold for other states and cannabis legalization generally?