In 2004, Tim O’Reilly popularized the term “Web 2.0.” According to Tim O’Reilly, “Web 2.0 is the business revolution in the computer industry caused by the move to the Internet as a platform, and an attempt to understand the rules for success on that new platform.[3] He went on to say, “Web 2.0″refers to the historical context of web businesses “coming back” after the 2001 collapse of the dot-com bubble, in addition to the distinguishing characteristics of the projects that survived the bust or thrived thereafter.[4]As we enter year three of federally legal hemp CBD, I am calling CBD 2.0.
I lived through the dot-com bubble having founded eSkye.com in 1999 as a B2B exchange for the alcohol industry. I then led through the transition from dot-com to Web 2.0 morphing eSkye.com into eSkye Solutions and shifting to become a SaaS software provider to the industry, at one point establishing it as the largest provider of dedicated software services to the wine industry. We also handled all the vendor managed pricing with Walmart, Walgreens, and other chains for many of the largest wine, spirits and beer companies in the world. I was also Chairman of Wine 2.0, which was a riff of the Web 2.0 movement to bringing technology and wine experiences together.
O’Reilly and Gary Vaynerchuk (winelibrary.tv and Vaynerchuk Media) joined us at the New York Wine 2.0 event that featured cutting edge wine start-ups and wineries, plus over 1,000 wine and tech lovers coinciding with O’Reilly Media’s Web 2.0 Expo.
This week, on Yahoo Finance, I characterized 2021 as “CBD 2.0.” as the beginning of a fundamental shift from the early “Wild West” days of the hemp CBD industry to a year that will lay foundation for national brands. Let me explain and see if you agree.
Pablo Zuanic, the well-regarded research analyst at Cantor Fitzgerald, put out several reports this week on the Cannabis and CBD markets and companies. As he points out:
“Macro view: our projections remain bullish for the next five years. Despite lackluster trends in 2020, partly COVID-related, and a slowdown pre-COVID in 2H19 – as lack of regulatory guidelines from the FDA prevented the FDM channel from adapting CBD a widely as had been expected, across formats and by all major retailers – projections remain quite constructive. Most estimates by the industry’s trade shops continue to forecast US CBD $ sales of $15-20Bn by 2024. The Brightfield Group projects sales of $15Bn by 2024, up from $4.2Bn in 2019. BDS Analytics projects sales of $20Bn by 2024, more than 10x the $1.9Bn in sales generated by the industry in 2018 (~50% CAGR), as per their estimates. BDSA estimates 63% of the $20Bn 2024 figures would be hemp-derived CBD and 37% marijuana-derived CBD. The current market split is as follows, according to BDS Analytics: ingestibles 47%, topicals 26%, inhalables 21%, pet products 3%, and 4% other (including pharmaceuticals). But as discussed below, without clear FDA guidelines and formal classification of CDB as a dietary supplement, the bulk of the FDM channel will stay reluctant to stock CBD products, and this will limit growth, in our view.”
He goes on to point out that without a major FDA/regulatory catalyst, it’s hard to see things improving rapidly from 2020. While I agree with his general assessment of the handful of public CBD companies he covers – cbdMD (YCBD/Neutral), Charlotte’s Web (CWBHF/Neutral) and CV Sciences (CVSI/Neutral)— I think those companies’ biggest issues are more related to the rising tide of other serious brands from mostly private companies but also new entrants. This new onslaught is much more sophisticated and include larger scale CPG brands than what the early CBD companies are used to competing against. Two such examples are Martha Stewart’s CBD Gummies launched by Canopy Growth and Molson Coors announced launch of their CBD beverage, TRUSS CBD in Colorado. This new crop of brand focused companies is leading the way and initiating the dawn of CBD 2.0.
Hemp CBD Early Days
In 2014, after years of grassroots efforts, Congress included an experimental program that allowed hemp to be legally grown in the US for the first time since 1937, provided it was attached to a University. 14 states ended up participating in the program. It was quite restrictive but a huge step forward for the industry. This was pre-CBD 1.0, a period of primitive CBD industry and initial consumer trials of the cannabinoid. During this time, there was a volatile) gray/illegal market for CBD with shady operators popping up all over brokering CBD from China and putting it into products with no testing, no truth in labeling and zero reliability. It was truly the “Wild West” and was common to have “brokers” claiming to have for sale or want to buy millions of dollars or liters of CBD, only to have them disappear when one actually tried to make a deal. It was a close cousin to the illegal cannabis industry with many of the same players participating in both.
I went to Washington DC to meet with congressional leadership in March 2018 to gauge the likelihood of expanding the hemp program nationally and of cannabis prohibition repeal overall. My impression was that full-on cannabis prohibition repeal still had meaningful opposition, but that hemp legalization could move quickly with bipartisan support.
My team jumped into it in 2018 growing 115 acres with partner farmers in Kentucky and establishing a hemp processing facility there as well. Just about everything that could go wrong did. The seeds were not great, the weather was terrible (wet when we needed dry and dry when we needed wet – “Welcome to farming,” they told me), our equipment kept breaking as most was not designed for the hemp plant, etc. Despite these challenges, we learned quickly and were able to lay the groundwork for what was to come.
Hemp CBD 1.0
Enter the Farm bill, which passed on a bipartisan basis and was signed into law in December 2018. This laid the foundation for a truly national, legal hemp industry, provided that each state set up a system and apply with the USDA. The excitement was palpable. It was a bit like a mini dot-com in terms numbers of start-ups, money flowing into the space, and news coverage. We bet heavily that the market would expand dramatically with legalization and committed to growing more than 1,800 acres of hemp with partner farms in KY and TN. We plowed millions of dollars into the production side of the business while at the same time putting a portfolio of brands together. We successfully launched our first brands into nearly 1,000 convenience stores in late 2018. It was a CBD “Gold Rush” with 100s of new “brands” appearing out of nowhere. Farmers switched to hemp production in mass, and $100s of millions of investments pumped into hemp processing operations. Big retailers began taking meetings with the anticipation of rolling out CBD products in 2019.
Between the Fall harvest of 2018 and 2019, the hemp growing, processing, and CBD ingredient side of the industry collapsed. In retrospect, perhaps it seems obvious that a frenzy of new investment and market participants in a brand-new industry would cause over-supply. Also, the proliferation of start-ups, populated with inexperienced business operators, caused plenty of issues. However, in a twist unforeseen by anyone but perhaps big pharma, the regulatory headwinds led by the US FDA threw a wrench in the momentum towards retail adoption. Their position was that CBD ingestibles are unsafe until proven otherwise, and therefore not permitted. This declaration caused most of the major retail outlets to cancel plans to bring CBD onto their shelves. (See my article in the Denver Post on this here)
The resulting destruction of value in the industry was swift and massive. Seven of the largest hemp processors who had raised over $400 million failed by February 2020 (pre-COVID lockdown). The largest, GenCanna, had a reported $2 billion deal to go public in the Fall of 2019, only to collapse into bankruptcy months later. I was 36 hours from a $700 million+ merger into a SPAC on NASDAQ when it unraveled in October 2019. We faced a collapsing market and a flight of investment capital. My team at Vertical Wellness took immediate action by cutting our costs and pivoting to a services business to help recover investor/creditor dollars from all these failed companies. In the end, we landed contracts to dry or process over 18 million pounds of hemp, making us profitable in 2020 during the pandemic. Given the retail environment, our brand launches were pushed into 2021, but we used the time and cash flow to prepare and make strategic acquisitions to be ready for what was to come. I share our rare success during a dismal time in the industry not to boast, but simply to inspire other entrepreneurs and demonstrate that being resilient and never giving up are essential qualities.
Entering CBD 2.0
In five years, we can look back and see if I called this too early, but something feels different to me. To be clear, I’m not suggesting good times are here immediately, but rather, we will soon be able to clearly see the path forward for a thriving cannabinoid industry. Here is my case that 2021 is the turning point for CBD.
1. Survivors: Only the strong survived the great destruction of CBD 1.0 – those of us remaining either pivoted, figured out how to make money, or emerged with new focus on execution.
2. Execution and Funding: The extreme loss of value has scared away many investors. This makes it a lot harder for new entrants to attain funding and for existing folks who are not executing to stay in the business.
3. State Permitted Ingestibles: In spite of the FDA inaccurate proclamation against the safety of CBD, consumer demand for health and wellness products has only grown. Fundamentally, consumers want natural alternative solutions (from Big Pharma drugs) to solve sleeplessness, anxiety, pain, and other ailments. Cannabinoids increasingly demonstrate their proper role in solving for this consumer demand. Just as in the overall THC-based Cannabis market, the States are leading the way in permitting ingestibles of CBD. This will accelerate in 2021. The states are driving permitted CBD consumption and consumer demand (it’s 47% of consumption nationally in spite of the FDA). Additionally, there are more studies coming out regularly, adding further lack of evidence of any harm caused by CBD. These factors and continued support from a growing bi-partisan group of lawmakers will eventually overcome big-Pharma’s grip over the FDA on this issue. I’m hopeful this can happen in 2021 but is not essential for my case for CBD 2.0.
4. Retailers Need for Growth: Retailers who are coming out of a crazy year of focusing on essential supplies or in other cases being shut down are looking for new ways to grow. CBD is back on top of their list of growth categories in which many are not yet participating.
5. Efficacy Matters: More and more companies and brands today are focused on the real impact CBD and other cannabinoids can have on people’s lives. Faster acting products with clear uses will lead the growth.
6. Real Brands: More legitimate, credible brands, not named “CBD this” or “CBD that,” are emerging. That would be like naming my new beer brand “Beer.” CBD is simply one of about 150 cannabinoids in the Cannabis plant that, when combined with the right balance of other ingredients (e.g. melatonin), can have tremendous efficacy in solving or alleviating real health and wellness ailments. Consumers want it, but they don’t know who or what to trust because of the lack of workable regulations and proliferation of unknown, unproven, generic brands. That is starting to change as premium brands are being backed by credible companies and honest leaders with proven track records. Our kathy ireland Health & Wellness® CBD solutions is a great example of this. Kathy is a recognized leader and advocate for women’s health. Our acquisition of The Organic Candy Factory is another. We are very excited to bring these to market.
As Tim O’Reilly once said, “Pursue something so important that even if you fail, the world is better off with you having tried.” I believe “CBD 2.0” is a worthy endeavor and indeed will make the world better off. I recently had my whole team read the late Tony Hsieh’s (former Zappos CEO) book Delivering Happiness: A Path to Profits, Passion, and Purpose. In it, Tony shares a plethora of stories where Zappos was at the brink of going out of business but found a way to persevere despite the odds. Had a small group of impassioned leaders not fought through those times, there never would have been a $1 billion exit. Many in the industry are in a similar moment. Those who show resilience and conviction will prevail. 2021 will prove to be the turning point in building a thriving, healthy industry that contributes to the societal good.
The Farm Bill of 2018 just passed the House and Senate and sits on the President’s Desk. Here are some thoughts on its impact on the Hemp and CBD industries as well as information on our activities in the space, I have shared in a number of interviews.
Here is our Vertical Wellness operation getting started in KY in October
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.â€
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.â€
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.â€
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.â€
About Verticalâ„¢
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.
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.Â
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.
We are in full planning mode for the 10th Annual WITS… hard to believe that a few of us sat around brain storming ideas for a “technology extravaganza for the wine industry” almost 11 years ago. Â Please plan on joining us this year in Napa, CA as we celebrate a decade of WITS, for what promises to be our most exciting and well attended event. Â Here is the link to the press release and posted below as well.
10th Annual Wine Industry Technology Symposium to Unite Wine Business Leaders, Technology Experts on June 30 & July 1, 2014
(NAPA, Calif.)  —The 10th Annual Wine Industry Technology Symposium (WITS)®, the premier event showcasing the strategic use of information technology and services for the wine industry, has been set for June 30 – July 1, 2014 at the Napa Valley Marriott Hotel. www.wineindustrytechnologysymposium.com
Executives from wineries, distributors and retailers gather annually at WITS, the only annual conference designed exclusively to foster education and debate around the application of technology solutions for the wine industry. The 2014 WITS program includes:
Educational Tracks – Sessions on Technology Leadership, Small Business, Consumer Direct, Trade Sales & Marketing and Vineyard & Winery Operations
Speed Dating – To celebrate the 10th technology extravaganza, WITS has introduced “speed dating†for winery CIOs and technology companies. This will provide opportunities for quality one-on-one time with key decision makers and thought leaders.
Plus Beer, with BITS – WITS has united leaders in the craft brewing industry to add the first Beer Industry Technology Symposium (BITS™) that will run concurrent with WITS this year.
“In today’s rapidly changing business environment, where consumers are driving massive change throughout the industry, it is vital to get it right when it comes to your route to market, as well as the strategic and tactical use of enabling technology,†said J. Smoke Wallin, WITS Co-Chair. “WITS is the only place where winery owners and GMs can sit side by side for a day of learning and discussion with CIOs and other technology leaders from across the three tiers,†he added.
The WITS Steering Committee, comprised of technology and business leaders across the wine industry, is currently finalizing panel topics and keynote speakers. Past speakers have included the CEOs, CIOs and leaders from Amazon, Facebook, Groupon, garyvaynerchuk.com, FedEx Office, Nielsen and 1800-Flowers, as well as experts from IBM, Oracle, Cornell University, UC Davis, Sonoma State University and many others.
Attendees and sponsors are encouraged to register early, as space is limited and expected to sell out quickly. Registration will open March 1, 2014. For more information visit www.wineindustrytechnologysymposium.com.
About The Wine Industry Technology Symposium (WITS)
The Wine Industry Technology Symposium (WITS) was created to address the unique information technology and services needs of the wine industry. WITS is dedicated to bringing the world’s leading wineries, distributors and retailers together with the leading technology experts to foster learning and discussion. Expert panels and keynotes discuss leading edge case studies involving consumer direct marketing and sales, operations, financial management, trade sales and distribution, winemaking and vineyard management. www.wineindustrytechnologysymposium.com
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.
