In the wake of marijuana being progressively legalized across the United States, ripples of CBD businesses have quietly spread throughout the Midwest, often operating in states with the strictest cannabis laws in the country.
It’s already one of the fastest growing segments of the cannabis industry, driven by the well-publicized medical benefits of cannabidiol and the legal gray area that allows hemp oil extracts to be distributed nationally. And as the buzz surrounding CBD steadily increases, it appears to be on the verge of exploding throughout North America.
According to a 2017 report by the market research firm Brightfield Group, hemp-derived CBD will be a $1 billion market by 2020. The Hemp Business Journal reports that hemp-based CBD products have seen a 53% annual growth rate, and that the total hemp market’s five-year compound annual growth rate of 22% actually outpaces that of marijuana at 16%.
CBD products are being sold by an endless variety of outlets, including online retailers, head shops, state-licensed medical and recreational marijuana dispensaries, and even major retail chains like Target (briefly) and Walmart, as well as the latest entrepreneurial trend — stores specifically dedicated to CBD.
Red State Retail
In February, American Shaman founder Vince Sanders celebrated the grand opening of his first kava tea and CBD bar in Kansas City, Missouri — the latest venture in the American Shaman franchise that includes 68 retail locations across Iowa, Florida, Nebraska, Kansas, Missouri, Oklahoma, Texas, Georgia and Illinois.
Now the company expects to open another 132 brick-and-mortar stores by July. The company also ships its catalog of 75 products to thousands of retailers across the country, on top of robust sales through American Shaman’s website.
Sanders admits he’s surprised by the company’s success. Four years ago, when he first started American Shaman in Kansas City, the idea was merely a novelty.
“You couldn’t have picked a worse spot,” he says, “but that was where we were. Honestly, I didn’t think it would pan out. But I was wrong. It was successful from the first month.”
The company does not do any hemp oil extraction. It uses imported oils to create a variety of products ranging from edibles to topicals. It just finished the production of a new fully-automated production line to meet the demand of its online and brick-and-mortar stores.
The company’s growth was “very organic,” Sanders says. “With the size of it, you would think there was this master plan, but that is just not how it started.”
In 2015, a friend of Sanders was selling CBD products through his high-end glass shop and wanted to turn it into a CBD store. Sanders voiced his immediate doubts about there being enough demand to support a store — upsetting his friend — but ultimately decided to back the idea, “just to see it.” Together they launched the first store and within a few months, Sanders says he started getting proposals for opening franchises of the business.
Trevor Burdett, the owner of two American Shaman stores in Kansas, was one of them.
“When we first opened our store, we didn’t even have signs,” Burdett says. “I just put up a little sign that said, ‘CBD Here’ and that was it. The floodgates opened. We sold out of product three times in the first week.”
The growth prompted Sanders to start reaching out to local grocers and drug stores to put up what he describes as “a CBD store within a store.” Representatives from American Shaman would train employees at each store about the products and how to answer questions. The combination of the franchise locations and having products at traditional retail stores boosted the company’s presence and led to new franchises and accounts being established across the Midwest.
“What’s happened is that Kansas has been our proving ground,” Burdett says. “If we can sell CBD in Kansas, we can sell it anywhere.”
Admittedly, the company had a lot of maturing to do in a short amount of time. Sanders built a corporate structure around American Shaman to screen locations, help new franchise owners secure their leases, approve new vendors, handle litigation and streamline production and distribution.
“We have product everywhere,” Sanders says. “I am confident, in all 50 states, Puerto Rico, Alaska, Hawaii. I would imagine by the end of the year we will have stores in the majority of all 50 states.”
Specialist in the Recreational Market
Until recently, the market for CBD products out west has been funneled through the well-established medical and recreational marijuana programs. More and more, though, consumers are able to buy CBD products from non-pot shops.
In Los Angeles, Gerland Avetisyan and his brother Grigor celebrated the one-year anniversary of their CBD store, Topikal, on Jan. 1.
Avetisyan and his older brother transitioned from cannabis to CBD after chasing LA’s medical marijuana market for years. While managing a couple dispensaries, the two brothers would use CBD regularly and often found themselves recommending it to friends. After seeing those recommendations multiply in recent years, they wondered why they weren’t focusing on CBD. And more importantly, why wasn’t anyone else?
During its first year, Topikal saw a handful of other CBD stores open throughout Los Angles. Being one of the only stores in the area, Avetisyan says multiple new owners would come to them for advice before opening.
“Of course, I would not mind giving them advice,” Avetisyan says. “There’s some competition, but it’s no bother to us. The more the merrier, you know?”
Unlike the majority of CBD retailers, Topikal focused on its physical storefront first, but has recently added the option of buying online.
“Yeah, the money is good online, and you have a lot more customers, but Topikal is more for people to come in and talk to us directly,” Avetisyan says. “We came to spread the knowledge and success that we’ve had with CBD, so we put our attention and energy into the store itself. We didn’t want to come in here thinking we’re going to make so much money. We had enough of that with cannabis.”
However, sales have been rising steadily since Topikal’s launch, despite not doing much in the way of marketing. Instead, it’s been driven by the same engine that pushed the brothers to open the store in the first place: word of mouth.
“We have our standard customer who comes in and tells us about how good it was for their cousin, a friend tried it and loved it, or how grandma got out of her wheelchair,” Avetisyan says.
Avetisyan says Topikal retained some customers from the brothers’ cannabis days, but the new shoppers tend to be older or shopping for an elderly relative. The demographic informs the products being sold at the store, such as tinctures, sublinguals, bath products, capsules, infused waters and teas. The majority of the products come from third-party vendors, such as CBD Living Water, which supplies infused water, gummies and liquid shots, and Hemp2o, a manufacturer of infused vitamin beverages. The Avetisyans’ in-house brand is produced and branded onsite from imported hemp extracts and despite the company’s name, includes a well-rounded variety of products.
“Topikal is just the name we decided on,” Avetisyan says. “Bath bombs, which we actually make ourselves, are one of our most popular sellers.”
Avetisyan declined to provide specific numbers, but says Topikal surpassed $100,000 in revenue its first year. He says the store is on track to triple its revenue by the end of 2018. He and his brother have been in talks with investors looking to back the company’s expansion into more locations across the state.
Cohabitating with Medical
While some medical marijuana businesses see CBD-focused retailers as competition — with a fraction of the regulation and a far broader customer base — others see opportunity.
In Santa Fe, New Mexico, Lyra Barren realized that many potential clients of her medical dispensary, Fruit of the Earth Organics, were simply not going to get their medical cards, so she decided to utilize the empty space next door to open a CBD outlet.
Fruit of the Earth Natural Health, the CBD-focused store, has been in operation for more than three years now. Comparatively, assistant manager Micha Helman says the CBD store generates roughly the same amount of revenue as the dispensary, but attracts more foot traffic, because customers are not required to have medical cards.
“The difference between the two businesses is absolutely night and day,” Helman says.
Like Topikal in Los Angeles, the demographic of shoppers at the Fruit of the Earth Natural Health CBD store is generally older than those of the adjacent dispensary.
“It’s becoming mainstream, for sure,” Helman says.
She says Fruit of the Earth avoided online sales for its first three years, but recently launched its digital platform about six months ago.
“Prior to that we’ve been very grassroots,” Helman says.
Due to the company’s growing e-commerce site, it recently established a shipping department a few blocks away. Barren also has a CBD café in the works, where customers can purchase raw CBD-infused foods and enjoy them in a relaxing atmosphere.
“It’s sugar-free, gluten-free, everything-free,” Helman says. “The café caters to the many people who have dietary needs in this town. Santa Fe is a very health-conscious town.”
Consumers should be aware that not all CBD products are what they claim to be.
A November 2017 study published in JAMA (The Journal of the American Medical Association) tested 84 products purchased from 31 different online CBD sellers. Nearly 70% of the products had different levels of CBD than what was indicated on the label. Overall, 36 products had more CBD than was indicated; 22 products had less CBD. Eighteen of the samples included THC that was not listed on the label.
Even among the 26 items that were considered accurate, there was a margin of error of 10% between the labeled dosage and the tested result.
“We have customers come in and say, ‘I have this hemp extract oil (they bought online), can you look at it and tell me what you have that’s equivalent?’” Fruit of the Earth Natural Health assistant manager Micha Helman says. “In fact, most of the time it doesn’t have CBD in it. You never know what you’ll get when you order online.”
The lesson, particularly for those buying products from unregulated businesses or online retailers, should be clear: buyer beware.
50 Shades, 50 States
Despite a growing customer base and retail footprint, the federal legality of CBD and the businesses selling it remain hazy, at best.
The Drug Enforcement Administration has already voiced its opinion that CBD is a Schedule I drug, no different than marijuana (and therefore, according to the agency, has “no currently accepted medical use and a high potential for abuse.”). The U.S. Food and Drug Administration has actively warned manufacturers and suppliers against making medical claims and has refuted the classification of CBD products as “dietary supplements.”
In mid-February, law enforcement officials in Tennessee raided 23 shops for selling CBD-infused candies and 18 individuals were indicted on charges (as of this writing, the case was ongoing).
Whether “Operation Candy Crush” in Tennessee is an isolated event or the beginning of a national trend remains to be seen, but it’s clear that CBD is a complicated business.
“We’ve had a lot of battles,” Sanders says. “We’re currently battling the attorney general in Kansas, the attorney general in Missouri, the attorney general in Nebraska. In Iowa we’re trying to get new legislation introduced. We have attorneys representing people in Texas. We’ve fought this from the front lines, big time.”
In Santa Fe, Fruit of the Earth’s website states: “Cannabidiol (CBD) is a natural constituent of hemp oil.
Fruit of the Earth Natural Health does not sell or distribute any products that are in violation of the United States Controlled Substances Act (U.S. CSA). The company does sell and distribute hemp-based products.”
When Marijuana Venture asked the New Mexico Department of Health about the requisites for CBD sales, a representative simply replied, “I don’t know. I know they sell it everywhere, but we only do medical (marijuana).”
Operators in other states asked to retract their interviews in fear of repercussions from regulators.
And even in cannabis-friendly states like California, there’s still a fair amount of “Reefer Madness” associated with anything remotely linked to marijuana.
Avetisyan says there were “a lot of hoops” he had to jump through to open Topikal, but it was still a lot easier than opening a marijuana retail store — particularly in Los Angeles. But the stigma of cannabis wasn’t completely lifted when Avetisyan and his brother started operating their CBD shop.
“A lot of the owners and landlords, they’re old-school, a lot older in age, and they’re not in the market of listening to you try to explain CBD to them.” Avetisyan says. “As soon as they would hear ‘hemp’ they would shy away from it.”