A growing number of cannabis-infused product manufacturers are using licensing agreements and manufacturing partnerships to have their products produced and sold in new marijuana markets.
It’s a sound strategy for growth, said Kristi Knoblich Palmer, co-founder of Kiva Confections, an Oakland, California-based infused product manufacturer that has used licensing agreements to expand outside the Golden State and into Arizona, Hawaii, Illinois, Michigan and Nevada.
Licensing agreements, she noted, help you achieve greater brand awareness and can help you prove your brand as a leader in the industry—and, of course, the added revenue is good for your bottom line.
“These agreements help the brand gain national exposure,” she said. “We see out-of-state expansion as a way to create relationships with consumers and gain their trust. Whether it’s their first experience or they are a seasoned veteran, having consumer trust and a positive reputation in (a new market) will help us immensely when prohibition falls.”
Here, Knoblich Palmer shares tips for how to strategically expand into a multistate brand.
1. Identify Key Markets
As legalization of adult-use or medical marijuana spreads, cannabis-infused product manufacturers have more choices for where to expand their offerings.
“In 2013 and 2014, the criteria for out-of-state expansion was much narrower than it is now—you were looking at any state with a cannabis program,” Knoblich Palmer said. “Now, there’s a wider spectrum of states and markets to choose from.”
That means cannabis companies can be more selective about the markets in which they participate, Knoblich Palmer said.
When eyeing expansion to new markets, consider:
- Population and patient count: You want to tap into a healthy head count of adult-use consumers or a market with an increasing number of medical marijuana patients. Markets with larger general or patient populations offer robust market share opportunities for brands. Examples include Michigan, a future recreational state with roughly 10 million residents, and Arizona, a healthy medical market with more than 186,000 patients.
- The geographic location of a market, and its ability to influence other states in the region: Massachusetts is a good example: It is the only state in the Northeast that currently has recreational cannabis sales, and it’s close to a number of populous states looking to launch recreational marijuana programs. Massachusetts also attracts roughly 28 million visitors a year, which means there’s ample market opportunity.
- Rules that allow out-of-state patients to purchase cannabis: Hawaii, for example, allows patients with valid medical identification cards from other states to purchase marijuana at its licensed dispensaries.
- Market regulations: You must know whether ingestible products are allowed and what potency rules exist. You also must know which product categories—candy or beverages, for example—are allowed, and you must understand packaging regulations that might require you to modify your packaging and labeling design. This may also require changes to standard operating procedures.
- The number of ingestible brands in the market: Will you be first on the shelves or entering a crowded field? If you’re new to an existing market and you have to fight for shelf space, there’s a greater need for marketing to boost your brand and connect with budtenders and consumers. That comes at a much higher cost. If you’re first to market, it’s a lighter lift in terms of consumer education and marketing.
2. Thoroughly Vet Potential Partners
It’s relatively easy for makers of traditional food products—granola bars or carbonated beverages, for example—to find new manufacturing partners. That isn’t the case for cannabis-infused product manufacturers, however, given that the industry is relatively new.
“Expertise in (cannabis) manufacturing is still very much an asset,” Knoblich Palmer said. “It’s still quite rare and not as easy as you’d think to find a new manufacturing partner.”
She said manufacturers should keep the following in mind when screening licensing partners:
- It’s beneficial for partners to have experience in the manufacturing and distribution of traditional consumer packaged goods, particularly food and beverages. Experience in cannabis or other heavily regulated industries—beer and liquor or pharmaceuticals, for example—is a plus, too. Also consider whether potential partners have adequate manufacturing and inventory storage space.
- Many markets require cannabis products to be tested for potency and contaminants, so it’s a good thing for partners to have an established relationship with a laboratory, preferably one nearby. If a laboratory is too far from a manufacturing facility, it creates an added difficulty in getting products to market in a timely manner.
- Partnering with a vertically integrated multistate cannabis operator can provide an opportunity to rapidly expand the number of markets where your products are offered. And there’s an added benefit of streamlined training on standard operating procedures. In other words, you have one point of contact and train one team of operators who, in turn, train others. The catch: If the relationship with the operator turns sour, you risk losing widespread distribution.
- Partners who want to rush to get your products to market aren’t necessarily the right fit. A commitment to quality and a desire to replicate your high-quality products is more important than speed to shelves.
3. Protect Your Brand
Intellectual property and brand protection are perhaps the most critical considerations for manufacturers that license their products for out-of-state distribution.
“A contract is a document you never want to have to look at, and a lot can be done by supporting your manufacturing partners,” Knoblich Palmer said. “We treat every issue seriously and work collaboratively to solve problems.”
To better protect your brand and intellectual property, she noted:
- Your contract must include a noncompete clause. During the course of the contract and in the event the partnership is terminated, a noncompete clause will prevent your manufacturing partner from using your intellectual property to produce similar products.
- Design all packaging for your products. Packaging is an important part of your brand identity, and rules for packaging and labeling vary from state to state. The design may need to be adjusted to comply with new rules, and you should maintain control over any necessary redesign to ensure it’s consistent or closely resembles packaging in other markets.
- Require manufacturing partners to purchase key ingredients directly from you. The ingredients in ingestible products—chocolate or espresso beans, for example—are an important component of product quality and consistency. Your contract should put you in control of that.
4. Conduct Thorough Training and Visit Partner Facilities
It’s critical that the product you manufacture in your home state has a consistent flavor and dosage with products made and sold in other markets.
This requires you to do in-depth training with your manufacturing partners.
Here’s how you can do that, Knoblich Palmer said:
- Invite your partners to your manufacturing facility to observe your operations. It’s a good way to show them how you’ve organized your space in a way that maximizes efficiency and how you document your processes. There, your partners can meet with your quality-assurance team and directors of operations, business development and commercialization to better understand your expectations.
- Review with your partner in detail your standard operating procedures and make any necessary adjustments. For example, a new market might allow higher or require lower doses of THC in products, and you may need to tailor product formulations to fit.
- Visit your manufacturing partners to conduct more in-depth training with their equipment in their facilities. There are unique environmental qualities—think temperature or altitude—that may require you to adjust standard operating procedures. Equipment also might vary in size or brand, which could require a change in process.
- Make regular visits to the facilities where your products are manufactured. Sample them in the facility to check for quality. And, in markets where you’re allowed to make cannabis purchases, buy your products in stores to make sure the off-the-shelf quality matches your expectations.
