Empire Builders

, Empire Builders

How a prominent infused products company has cemented partnerships with other businesses to fuel its national expansion

by Omar Sacirbey

The founders of Dixie Brands compare their business to one of the largest consumer products companies in the world, a behemoth that has developed a deep bench of powerhouse brands that are popular across the globe.

“Think of us as PepsiCo,” said Tripp Keber, who founded Denver-based Dixie with partner Chuck Smith in 2010. “PepsiCo’s core product is Pepsi Cola, but they have a whole slew of products and brands underneath that flagship.”

Indeed, PepsiCo also owns the popular Cheetos, Mountain Dew, Fritos and Quaker Oats brands, among others.

Keber and Smith have built Dixie in a similar fashion, developing a following for the company’s main product – cannabis-infused beverages – as well as everything from chocolate bars to mints and lotions.

They also are hoping to mimic PepsiCo by embarking on an aggressive expansion strategy to move well beyond Dixie’s Colorado roots and bring the brand to other markets in the United States and even other countries. The idea is to become a national manufacturing and distribution powerhouse that churns out consistent cannabis-infused drinks and edibles – not only those the company makes, but also those of other infused products manufacturers.

The lynchpin in this expansion strategy has been the ability to team up with marijuana companies from coast-to-coast and internationally.

Since 2012, Dixie has been methodically striking partnerships with businesses to manufacture and distribute its products under its brand. The company has inked deals with businesses in five states outside of Colorado: Arizona, California, Maryland, Nevada and Oregon. These arrangements have allowed Dixie to navigate the patchwork of state marijuana laws and deal with the federal ban on shipping cannabis across state lines. Dixie also is involved in a joint venture in Washington state, where the facility should become operational in the first half of 2017. Dixie was not at liberty to disclose the Washington partner’s name.

Moreover, Dixie has hooked up with companies in Australia, which is rolling out a medical marijuana program, and New Zealand, which hasn’t yet legalized MMJ but could soon. Those partners have some infrastructure in place and will be ready to move forward with Dixie as soon as the markets develop.

Expanding certainly has its dangers, but finding the right partners can mitigate them.

“There is incredible risk, and you can burn through money very quickly and not have anything to show for it at the end of a year,” Smith said. “We need to have predictable partners at the table. That predictability and consistency is key.”

Blueprint for success

Dixie’s preferred approach requires it to put skin in the game.

The blueprint looks something like this:

  • The company first looks to form a relationship with a grower-processor in another market.
  • Dixie then forms a joint venture – with an entity that is not the operator – that provides various services for a turnkey operation, including elements like real estate, equipment, technology platforms and intellectual property associated with Dixie. By doing this, Dixie helps ensure the operation can produce products to its standards. The joint venture doesn’t control the company that operates the facility in any way, but it still allows Dixie to better control the standards within each market without having to touch the plant or product.
  • The operator processes the cannabis and produces and distributes the infused products, giving Dixie manufacturing and distribution anchors in key markets.

Over the years, Dixie has refined its partnership model – which has included some licensing deals – after encountering potholes and bumps in the road.

“We require the partner in each state to do what they have to do, which is touch the plant. They have to cultivate, extract, manufacture and distribute the product,” said Smith, who is now Dixie’s chief operating officer. “We bring in investment, personnel, guidance and oversight so we’re ensuring that everything they do is under some level of direction from us.”

Because Dixie doesn’t touch product in these states, investors are more at ease with putting money into the expansion. That’s because if federal authorities were to crack down on state-licensed marijuana businesses, the side of Dixie’s business that doesn’t touch the plant would be insulated from potential criminal and financial repercussions. Moreover, Dixie’s financial stake in the relationship also gives it a say over what the partnership will do next.

“Where we really believe this industry will ultimately head (is) you have centralized or regional manufacturing, (and) then you have state-by-state distribution,” Smith said. “We’re in essence building that, although we need to build state-by-state manufacturing because you can’t ship across state lines.”

Lessons Learned

A couple of years after starting Dixie in 2010, Keber and Smith saw demand for new products and opportunities in markets like California, Nevada and Arizona.

“Ultimately if you look at our expansion, all of it is focused on the West Coast, because we fundamentally believed that would be the logical area of the country where the adult use of marijuana would be implemented,” Keber said. “That’s how we started to develop our expansion plans.”

The company’s first expansion-minded partnership, however, failed.

In 2012, Dixie partnered with holding company Medical Marijuana Inc. to start Red Dice Holdings. Its purpose: cement deals with infused products manufacturers in other states. Dixie’s partners, for their part, would have access to Dixie’s formulas, recipes and packaging so they could produce the products.

But the relationship soured in 2013 and Dixie filed a lawsuit charging Medical Marijuana Inc. with breach of contract and failure to perform obligations, according to court papers. The two parties settled in 2014. The settlement forbids the parties – including Keber and Smith – from talking about the dispute.

At the time, the two companies said in a news release they had resolved their year-long legal dispute. The financial terms weren’t disclosed. Under the deal, Dixie Holdings sold its 40% share of Red Dice while purchasing back Dixie Elixirs brands and related assets, and Medical Marijuana Inc. retained Dixie Botanicals, a CBD product line and related assets.

Undeterred, Dixie continued to look for opportunities and in 2015 announced a licensing agreement with Indus Holdings, a California company that already owned one edibles maker, Altai. Under the agreement, Indus has a license to produce Dixie products and Dixie reaps a percentage of the profits. Dixie has a smaller investment in the relationship, but also less influence.

“It’s not the same (as a partnership). It’s like whether you own a house or rent one,” Smith said. “When you rent you hate putting a hole in the wall, but you don’t care quite as much as you would when you own. And your goal is to increase the value of the house.”

As Dixie has progressed, it has learned that licensing agreements are complicated to manage.

While the Indus deal got Dixie products in dozens of stores across California, the two management teams haven’t always shared the same goals.

“We realized what we needed to do going forward was to have a much more active role, as much as we legally could in every state to control the brand and control the experience of manufacturing and distributing the brand,” Smith said. “Now that’s complicated because we aren’t licensed in every state to do business, so we have to work with a qualified partner who is licensed. And we have to have a structure that allows us to provide as much influence and assistance to them as possible, so that we are controlling our brand expansion.”

Keber added, “It becomes more and more challenging through a licensing agreement to be able to control quality and have that assurance that a Dixie (product) is going to be the same in Nevada as it is in Colorado and Arizona. This new shift that Dixie has brought to the market is really to mitigate that risk and build the assurances that we need as owners of intellectual property associated with cannabis brands.”

Refining the Model

Dixie took those lessons to its next target markets.

Consider Nevada. Dixie delegated Keber with the first round of reconnaissance into that market, where he met the owners of Silver State Wellness, a dispensary on the Las Vegas Strip that wanted to integrate grow and processing capabilities.

Silver State already had a building under contract, and Dixie worked with the company on the design, layout and funding of the facility – which gave it that added level of control it was seeking. It also directed improvements on the inside so that rooms flowed properly and had the right type of equipment for the products being manufactured.

“We liked them because they were socially, politically and financially plugged into the community,” Keber said.

The relationship still includes a licensing agreement, however, to protect Dixie’s intellectual property at the manufacturing level.

Contract Production

Ultimately, Keber and Smith don’t envision their partners manufacturing product just for Dixie. Rather, they believe the manufacturing facilities could generate additional profit by producing products for other companies.

Say, for example, a company is developing a new brand in a state or a celebrity wants to launch a line of marijuana-infused products to sell in multiple markets.

“They’re going to come to us because we can give them the quickest path to market distribution as opposed to having to do these one-off relationships state by state,” Keber said.

Are there any concerns that Dixie could end up creating a product that could compete against the company’s own products?

“Sure,” Smith said. “But we’ll have the ultimate discretion. And if we think it’s too competitive for whatever reason or if we don’t think we can do a good job, then we wouldn’t sign up for it.”

There are precedents. Bacardi, for example, sells 20 spirits that compete with each other. However, Bacardi owns those brands and is responsible for how they are marketed, distributed and sold in the desired volumes.

“We’re not going to be any different,” Smith said. “And our goal is to ultimately get as much shelf space or real estate in dispensaries as possible.”

Local Boys Make Good

While Dixie strongly prefers financial and operational partnerships, it isn’t opposed to license agreements if it’s the only way into a targeted state. That’s why the company hammered out a license agreement with Curio Wellness, one of 15 companies awarded a preliminary cultivation license in Maryland. That state is expected to have one of the largest medical cannabis markets on the East Coast.

Ultimately, Dixie hopes its relationship with Curio will become less of a licensing agreement and more like the financial relationship it has with Silver Stare Wellness.

“Initially, as they’re deploying under the medical program, they don’t need as much of that value today,” Smith said of Curio Wellness. “But as their regulatory model changes and matures over time, and as the business increases and we’re able to bring more opportunities, then it’s easier for us to evolve this into more of a partnership and less of a licensing agreement. But it’s determined by the value that we each bring and the state of the maturity of the marketplace.”

To make sure its partners produce the products to Dixie’s expectations, the company regiments the production equipment and issues standard operating procedures. But not all markets are the same, with some requiring equipment that produces in smaller batches while others require gear for larger batches.

“Every product that we have in our portfolio has to be manufactured both small-scale and large-scale. Because you might have a market like Arizona where right now it’s just medical but later could be rec, and then markets like Nevada that will have a million consumers,” Smith said. “We have to be able to provide the processes and the equipment that can scale from small-batch processes up to large commercial manufacturing.”

An added wrinkle is that regulations not only vary state to state, but also among municipalities within states.

“There are no economies of scale in this business, and that makes this a very complicated business,” Smith said. “And that causes us to have slight differences in packaging and labeling, formulation, and that makes a predictable cost-of-goods-sold model a little bit challenging.”

It can also make it hard to achieve product consistency – never an easy thing in the marijuana infused products category.

To do so, Dixie instructs its partners follow a very strict set of standard operating procedures.

“We really want that Dixie product to taste and behave the same way regardless what state you bought it in. That’s even more important now with adult use. People are going to travel to these rec legal states and we want them to have the same positive experience every time,” Keber said. “If they don’t have a positive experience in a particular state, it’s not going to be the manufacturer that takes the criticism. It’s going to be the brand, so we can’t allow that to happen.”

While Dixie’s current ventures are keeping Keber and Smith busy enough, they are also looking to take the company into other states. Company executives doubt President Donald Trump will interfere with the cannabis industry and have no plans to put the brakes on their expansion plans.

“Most people in the industry believe the federal government will eventually capitulate. And when I say capitulate, I mean they’re going to legalize marijuana at the federal level,” Keeber said.

New Markets

Among other states, Dixie has its eyes on Massachusetts and Illinois, two markets it’s been examining for a while. But the company hasn’t found a partner that will fit its needs.

Company executives are also seeking to expand the company’s international footprint and could try to enter Canada as early as this year. They’ve also been in talks with aspiring cannabis entrepreneurs in Germany and Croatia.

The key to getting into those markets will be having the flexibility and decisiveness to strike under almost any circumstances.

“You actually can’t be ahead of the curve in this industry. This industry is going too fast to say, ‘OK, we have all our ducks in a row. We have all of our financing. We have all of our team and our infrastructure, now we can get going,’” Smith said. “It’s actually just the opposite. You’re not ever going to be ahead of the curve.”