CNBC’s Fast Money with Smoke Wallin re Branding Cannabis, Wine & Spirits and Market Observations

Thanks to CNBC and the Fast Money crew for a fun interview on the state of the cannabis industry.

Cannabis industry exploding with growth here, says top pot exec

The cannabis business is growing like a weed, even as pot stocks see wild swings. With Smoke Wallin, Vertical Companies, CNBC’s Scott Wapner and the Fast Money traders, Pete Najarian, Tim Seymour, Karen Finerman and Guy Adami…

Smoke Wallin on CNBC’s Fast Money

A few shots from the day at CNBC:
 

 

 

 

COURTNEY DORNE AND J SMOKE WALLIN JOIN VERTICAL COMPANIES EXECUTIVE LEADERSHIP TEAM

VERTICAL EXPANDS EXECUTIVE TEAM; CEMENTS LEADERSHIP IN LEGAL CANNABIS INDUSTRY

Courtney Dorne, J. Smoke Wallin bring significant executive experience in Food and Alcohol Beverages to one of country’s leading medical cannabis companies

Los Angeles, CA (January 25, 2018) – Vertical, one of the country’s leading vertically integrated medical cannabis companies, announced today the addition of Courtney Dorne and J. Smoke Wallin to their leadership team.  Dorne is an entrepreneur and food industry leader who joins Vertical as a partner and President of Vertical Brands Co.  Wallin is a serial entrepreneur and thought leader in the beverage alcohol industry and has joined as a partner, Chief Marketing Officer and President of Vertical Distribution Co.

Vertical was founded in 2014 by entrepreneurs who saw the potential created by the transition of cannabis to a legitimate and legal business. Drawing from results-driven expertise in a variety of industries, the Vertical team has a synergistic energy that offers proven experience from seed to sale.

“I’m thrilled to welcome Courtney and Smoke to our executive team,” said Todd Kaplan, Founder & CEO of Vertical.  “Smoke’s deep knowledge of alcohol distribution and scaling new businesses in highly regulated industries, combined with Courtney’s perishable food distribution and extensive network strengthen our competitive advantage in the rapidly evolving legal medical cannabis industry.”

According to The Arcview Group, the U.S. legal cannabis industry represented over $6.7 billion 2016 and is expected to grow to between $22 and $50 billion over the next 10 years. Legalization of the medical cannabis industry began in 1996 with California’s passage of the Compassionate Use Act.  Since then it has operated in a quasi-legal environment with conflicting laws throughout the land, while growing exponentially.  2014 marked the beginning of adult recreational cannabis legalization with Colorado and Washington leading the way.  Today there are 29 states that have legalized either medical only or medical and adult recreational cannabis production, distribution, retail and consumption.  Gallop recently reported 64 percent of Americans support cannabis legalization nationally. In this vibrant space, Vertical is a pioneer and is the first to offer fully integrated services from legal compliance and operation of cultivation to extraction, product development and marketing.

Dorne brings literally a lifetime of experience in food services and the restaurant industry to Vertical. From her family’s restaurant to founding the giant Fresh and Ready Foods, Dorne has a proven track record in food manufacturing and perishable packaged food distribution and has built an extensive network of customers ranging from airlines and hospitals to convention centers, the military and convenience stores, all the while working under the rigorous scrutiny of FDA and USDA regulations.  She is a member of the YPO Global One chapter and is the current Chair of the Women’s Network (WYN).

“After years of suffering from debilitating pain and crippling migraines as a result of extensive surgical procedures, I learned first hand about the efficacy of cannabis on pain management,” said Dorne. “All too often our culture is quick to treat pain with a pill and we’ve all seen what that has gotten us. I believe that legal cannabis can be a part of a legal, safer and healthier alternative and I’m thrilled to join the team that can help make this happen.”

Wallin comes to Vertical by way of Taliera, a company he founded in 2005 to create, acquire, manage and advise brands in the beverage space. His career in beverage alcohol has included serving as Chairman & President of the Wine & Spirits Wholesalers of America (WSWA) and EVP and CFO for National Wine & Spirits (now part of RNDC/Breakthru). He is also active in YPO as Chair of the Beer, Wine and Spirits Network and has been active in legislative and regulatory affairs.

“I have always loved innovating, doing deals and building enterprises to scale, particularly in the beverage alcohol space,” Wallin said.  “I’ve been studying high potential growth brands and companies, and Vertical and is at the forefront of the rapidly growing legal medical cannabis industry. Both industries are highly regulated and for some time I have been expecting them to converge. The recent investment by Constellation Brands[STZ] in Canada’s Canopy Growth [WEED] validated my premise, and I couldn’t be more excited to be part of the team building brands and distribution in a market worth $100s of billions globally.”

Wallin continued, “I can’t help but think of Sam Bronfman in 1933 at the Repeal of Prohibition who went on to build Seagram into the alcohol industry leader it became before selling to Diageo and Pernod Ricard. Vertical is positioned to achieve that level of success.”

About Vertical™

Vertical is one of the first and largest vertically integrated companies in the legal medical cannabis industry. It’s operations in CA, AZ and OR combined with strategic partnerships in CO, MI, and NV position it well to take advantage of the rapid legalization and normalization of cannabis globally. Vertical is led by an executive team of entrepreneurs and business leaders from the alcohol beverage, agriculture, CPG, distribution, entertainment, food and medical industries. Vertical’s operations include planning, permitting, development and operation of cultivation, extraction, manufacturing, distribution and retail facilities.  It has world class capabilities in product development, co-packing, branding, marketing, education, and legal compliance, Vertical does Everything Pertaining to Green. For more information visit www.vertcos.com.

RE: Is There A Craft Beer Bubble?

Craft Beer Bubble? May 2015

Fortune Magazine published a story by Chris Morris  May 14th that is getting a bit of attention, posing the thoughtful question: Is craft beer in a bubble?. The New York Times  published Craft Beer Is Booming, but Brewers See Crossroads asking the same question on February 4th.  I am now getting this question quite frequently from my friends both inside and outside the industry.  I’m in Chicago at the National Restaurant Association Show #NRASHOW and this was a hot topic last night over cocktails. 

It is particularly relevant given the amount of new outside money (many of my YPO and friends from other industries are investing in local breweries and increasingly distilleries.)  I read the statistic that there is a new brewery opening on average every day in the US this year.  In Fortune, they increase this by end of year to every 12 hours.   This statistic is a bit alarming on face value, but let us dig a little deeper.  To answer the question, one must answer two others:

1. Market Growth: Where is the market going – meaning is the growth in craft share going to continue and to what level?

2. New Capacity: Given the market assumptions from #1, can the size of the market absorb the growth in total capacity?

Market Growth:  First, a little perspective:  In craft beer boom 1.0 (circa mid 1990s), Chris Miller correctly points out there was a slow down in late 1997 and then flat to low growth for more than a decade before the current much larger boom.  My company at the time was actively investing in and building multiple craft beer brands both on the distribution front in Chicago (Goose Island, Sierra Nevada, Pete’s, Bells) as well as regionally/nationally (Goose Island, Rogue).   Fortunately, we also had a healthy import business (Grolsch, Staropramen, Tennant’s) that continued to boom during the slowdown.  At the start of the current boom, we helped Flat12 start-up in Indianapolis and acquired Napa Smith Brewery in 2009 (sold in late 2012).   There is very little comparison this time around from the 1990s.  The degree of craft beer penetration into the beer market is fundamentally different.   It is much deeper and wider, and is touching every market in some way.  That said, the current level of craft sales as a percentage of the beer market is still quite small nationally (11% of volume according to the Brewers Association) vs in select highly developed craft beer markets (Portland, Seattle, San Francisco, Denver).  That number has roughly doubled in the past 5 years.   I predict craft beer sales will double again and exceed 22% of the US beer market by 2020.  This mean approximately 22 million barrels of new craft sales on top of the existing 22 million.

(NOTE: one aside/caveat: craft beer is narrowly defined as independent brewers excluding cross ownership by larger companies in the alcohol industry.  This is more political than it is any reality with consumers.  Therefore the current share is actually a bit larger than 11%, adding in brands from companies like Goose Island and Craft Brewers Alliance (ABI).  My 22% number includes craft taken over by larger brewers).

New Capacity: This is where the “new brewery every 12 hours” statistic is not the most relevant one.   The important question is how much new capacity is actually being added to existing breweries combined with new breweries?  95% of the new breweries (and existing breweries) are more like restaurant businesses with a touch of manufacturing, than they are breweries.   They will never sell any meaningful volume outside their four walls of the tasting room.  There is nothing wrong with a local brewpub being a go-to stop for local people and there is clearly a market for this form of on-premise account.  The real question is how much capacity are the production breweries adding and how many of the start-ups actually believe they are going to sell beer outside their four walls.  This is where the true competitive dynamic in the marketplace will come into play.  Most new breweries that intend to go to market through distribution and retail will fail.  This is not because they have bad beer (some might but will die quickly) but rather they cannot make their brand relevant to the consumer in such a crowded field.  This lack of differentiation and branding will prevent them from having any meaningful distribution and retail penetration.

The lack of experience in running a full service brewery with a restaurant, attached to a major manufacturing operation, attached to a distribution business, attached to a consumer marketing company will be the downfall of many.   Here at the NRA, the 1000’s of operators can attest to the competitive nature of the restaurant aspect alone.  There are a lot of smart investors in restaurant companies that have leadership teams with deep experience fighting hard for their share of the consumers’ purchasing dollars.  Breweries that want to scale must both run a brew pub that competes with them and figure out how to sell in their beer to a limited number of tap handles available.

 

 

My conclusion as of today: The market can absorb many more breweries and capacity than exists today.  The ones that remain focused on serving their local clientele will have the best chance of success.  The ones that enter the fray of production and distribution will enter one of the most competitive and tough businesses that exist.   Those that do not bring an experienced team, significant capital, creative and compelling branding and distribution to the table will fail.  There is a bubble of inexperienced entrepreneurs combined with inexperienced investors who are entering the market.  I look forward to the shake-out and the opportunities it will create for those prepared. In the meantime, I love capitalism at work and entrepreneurial spirit the craft beer market is demonstrating for all to see.

Channel Conflict: 3 Tier Battles Heat Up – Stinging Defeat in KY Raises Questions

The headlines and press statements around some of the latest beverage alcohol industry channel conflict are extraordinary and gaining attention across the country.

A new craft brewery is opening up every day, adding to the over 3,000 currently operating in the USA (Brewers Association).   There are 100s of new craft distilleries that have opened up over the past few years with many more in the works (American Distilling Institute). There are more than 7,000 wineries as well (Wines & Vines).

This buds for you

All this growth in new entrants is the result of renewed consumer interest in trying new things. The Millennials have driven much of the new growth and vibrancy. It’s an exciting time in the beverage industry. That said, every large-scale established consumer brand across multiple industries is trying to figure out what to do and how to keep their base, grow it and remain relevant.   Anheuser-Busch Inbev was roundly criticized for their “anti-craft” beer advertisement for Budweise

r during the Super Bowl. As I wrote about, this was them playing the hand they hold and making the best for a giant brand in decline.

These issues are a lot more complex than they appear and have interesting and changing industry alliances. I am constantly asked (last night included) why the laws are the way they are, by consumers and business people who are not from the industry. Here is a brief explanation:

The simple answer is the current legal and regulatory framework in the US is the result of two Constitutional Amendments. The first one was to ban all alcohol aka Prohibition (18th Amendment in 1919). The second one was to repeal Prohibition (21st Amendment 1933). To pass a Constitutional Amendment the Congress must pass it with a 2/3 majority vote in both houses and then it goes to the 50 states and must pass ¾ of the statehouses to become ratified.   A very high bar indeed. Prohibition was a national disaster of epic proportions. However, it was created in response to some significant excesses by the industry and public. A lot of the excesses were blamed on what is known as “Tied-Houses”, whereby the brewers owned the taverns. The drunken excess of many in the public was attributed to the brewers have a direct interest in selling as much beer as possible and controlling the point of consumption. The saying “There is no such thing as a free lunch” came from this era. The brewers would give away free sandwiches at the taverns they owned. Sounds good, but they would salt these sandwiches excessively so that the patrons would drink more beer.

Whether you agree or not that “tied houses” were the root of all evil, this was the majority view when in 1933 the nation’s failed experiment in Prohibition came to an end. Even though it was clear to most that this government intrusion into industry was a disaster, there were still large numbers of anti-alcohol constituents throughout the land. The compromise to get the 21st Amendment passed was to allow each state the absolute right to regulate the sale and distribution of alcohol within its boarders. The 21st Amendment does not have an opinion on tied houses or any other aspect of how the industry does business. The Federal Alcohol Administration Act did spell out specifics on regulations of the industry to insure the revenue and to protect consumers. It did not however, spell out any specifics regarding a “3 tier system”, but rather defers to the 21st Amendment that in turn defers to the states.

IMG_6572

Each state proceeded to set up its own set of laws and regulations.   There are 50 states and 50 sets of laws that while some may resemble each other, none are identical. Layered onto the specific statutes and regulations are the interpretations by alcohol boards or chairmen and the courts.  The most common way in which the states addressed the tied house issue was to legislate a middle tier (wholesaler) to be a buffer between the suppliers and the retailers. This is what is commonly referred to as the 3 tier system. There have always been some states that allowed brewers to own wholesalers, though this was the exception.

In the case of Kentucky’s new law, Anheuser-Busch Inbev has owned distributors there for more than 40 years and had attempted to buy a 3rd. That prompted the wholesalers to attempt to stop them and when other means failed, it ended with this new legislation not only not allowing them to buy the new distributor, but also forcing them to sell their existing businesses. I have no idea of how the courts will view this, but from the sound of it, ABI will not go quietly.

I can’t help but think the latest turn in the 3 tier beverage alcohol industry channel conflict is an example of overreaction that will do nothing but cause further escalation. When one considers all the new brands that have launched and keep launching in beer, spirits and wine and the need for each to find ways to market, it is clear that broad based full line distributors provide a viable route to market for many. All of the main distributors have giant books of brands now, and they serve some very large suppliers and many smaller ones well. In many cases they serve these needs of smaller brands by creating specialty sales divisions. They do not serve every brand well, nor can they. This has created market conditions in most states where a new crop of smaller start up distributors have emerged, primarily handling specialty or craft brands. Where specialty/craft distributors have emerged, they have become a necessary escape valve for small and new brands getting distribution to retail. In markets that allow it, and many states have provisions up to a certain size, craft breweries can self distribute. This is expensive but a necessary option in cases where there are no viable distributors to carry a new brand. Stone Brewery in San Diego and Sun King in Indiana seem to be examples of self-distribution that has been successful. I wonder if this will become more prevalent with spirits as the number of craft distilleries grows.

2015-01-21 11.18.45  IMG_6561The current approach, though ugly at times, has worked to provide a route to market for a thriving craft community.   The pressure to get new brands to market is only going to increase. It is unclear to me where the craft community will end up better off – with strict laws that don’t allow suppliers to own distribution (of any size) or with looser laws that give options. I tend to think most small/new brand will end up supporting a more flexible system, but the bigger brands, that are doing well in the traditional 3 tier system, will support the stricter system.

It may be that there are simply too many competing interests to work out viable solutions to everyone’s satisfaction on these issues. It would certainly be better for the industry if there were agreement as opposed to legal or legislative fights. ABI is a powerful entity as are all the major suppliers. Poking them in the eye with a local legislative win, may end up being a case of winning the battle but losing the war in some ways. It is unclear to me that the KY law actually helps craft brewers or simply hurts ABI or it it even does that. ABI can still control largely the activities of an independent distributor, as they have been able to do, in many other states. What is clear is that this KY battle is not the end to this fight.

It will be interesting to see how this continues to play out. Love to hear your comments or questions. Cheers! Smoke

————————————–

Smoke has worked in all 3 tiers of the industry, built beer wine and spirits distributors, owned a craft brewery, a winery, and multiple craft spirits brands.  He built the leading technology for pricing between suppliers, distributors and retailers. He also represented the WSWA as Chairman & President and the Brewers Association on the Government Affairs Committee.

————————————-

«

%d bloggers like this: