Where CPG and Retail Converge: Unique Aspects of Cannabis Verticalization
“Sundial becomes a stronger and more diverse cannabis company by acquiring Inner Spirit and the Spiritleaf retail store network,” said Zach George, Chief Executive Officer of Sundial
In May 2021 Sundial, a Canadian cannabis Licensed Producer, announced the acquisition of Inner Spirit and its Spiritleaf retail network, taking Sundial’s portfolio of products and layering in a strong retail footprint. And it’s a very strong retail footprint at that, with Spiritleaf being the largest single brand retailer in the Canadian market, opening its 86th store April 2021, with projections to break a 100-store milestone in the summer of 2021 (Disclaimer: Headset provides market intelligence and analytics services for Inner Spirit through point-of-sale data, market intelligence and consumer buying trends that enable a real-time view of sales and store inventory). With this acquisition, you have a cannabis brand extending into cannabis retail — a model not entirely uncommon within cannabis.
The Evolution of Cannabis Verticalization
In the early days of legalization, being vertically integrated was the primary method that dispensaries and collectives could ensure consistent supply for their patients. This had the obvious advantages of attracting consumers to a dispensary as it was a way to differentiate through quality genetics and production in what was primarily unbranded flower products, but layered in complexity for at the time small scale operations.
Modern Vertical Integration
Fast-forward to today, with large scale organizations like Multi-State Operators (MSOs) taking this model to the next level producing their own private label products, driving retail and often distributing their brands wholesale to other retailers. This is in many ways driven by necessity due to limited licensing and availability of products. For example, the MSO operators who have started their footprints in limited license medical markets on the east coast, building out brands was a necessity as no wholesale products are brands were available.
This strategy plays out in different ways. Curaleaf, which owns and operates 106 dispensaries in the U.S. across a variety of territories, has highlighted their strategy in emerging markets like New Jersey is different, with ambitions to be more of a CPG company and less of a retail organization in that particular region. Much of the strategy is the byproduct of the dynamics of each market driven in large part by license access and legislative frameworks within the region.
“In New Jersey, our goal is different. We’re looking to be the wholesaler — that’s why we’re building the big grow, so we can supply the whole market with product.” — Boris Jordan, Curaleaf Chairman via Forbes
Beyond Limited License Markets
Even away from strictly vertically integrated, limited license markets so predominate in emerging medical states, there are examples of this strategy in markets that don’t require vertical integration. One example would be the Glass House Group in California, who have a retail footprint with their Farmacy store locations and a brand profile with Glass House Farms and Forbidden Flowers.
Combining a CPG strategy with a retail component has advantages, including better understanding your customer base through the direct connection available with retail. It also is a launchpad for an omnichannel play with retail providing a direct-to-consumer component. But it cuts both ways, with aspects like channel conflict potentially limiting broader distribution given other retailers may ultimately become competitors with their own brands. As more retailers pursue distributing private labeled brands into other retailers, naturally more retailers will be less inclined to carry those products, limiting the brands reach making it harder to capture the broadest audience.
The Sundial and Inner Spirit Combination
Sundial’s acquisition of Inner Spirit and their Spiritleaf retail locations provides these same advantages that organizations like Glass House Group are able to enjoy. It gives Sundial a channel to connect directly with retail consumers and promote Sundial products in unique ways through their retail channel. Where it may hurt is getting distribution within competitive retail chains, such as Tweed or Tokyo Smoke owned by Canopy Growth where Sundial products are listed for sale — although this may be mitigated by Canopy Growth’s interest in ensuring their products will continue to be available at Spiritleaf locations.
Traditional CPG, Retail and Private Label
In traditional CPG channels, with brands there is a trend to push into direct-to-consumer, enabling a new channel for sales and a direct relationship with customers. For retailers there is a push into more private labeled products to capture more of the value-chain directly, leveraging the insight they receive from customer sales to drive product innovation.
Expanding on Private Label
Private label is nothing new for traditional retail, Sears has long had their Craftsman line of products and Costco’s Kirkland brand drove close to 30% of their sales in 2018. But those private labels generally stay within their retailer ecosystem, for example you never see Amazon Basics products sold at Best Buy. There is some changes happening though as seen through deals such as Kroger distributing their private label brand Simple Truth through Alibaba’s TMall e-commerce platform within the China market.
Cannabis as the new model
Having the core competency of brand development, with its foundation of innovation, cost-efficiencies and marketing driven brand growth combined with strong retail expertise on reaching customers and operating omnichannel outlets sounds like a big hurdle. But each side is tiptoeing into eachothers spaces, with CPG brands building direct-to-consumer models, and retailers developing strong private label brands. For retailers, it’s only a small step to taking those private label brands beyond their retail walls and for CPG to begin to build a retail footprint.
Cannabis is certainly a unique category, but the model of brand and retail consolidation today does contain some lessons for traditional retail and CPG. I believe it’s more likely to see a retail private label product begin to be distributed more broadly taking the form of Kroger’s Simple Truth selling alongside Target’s Good & Gather. The shift from CPG into retail is a bit more challenging, and I don’t see Frito-lay having ambitions for a Walmart-like footprint, but something a bit beyond the direct-to-consumer platform might make sense.
What to Watch For
Sundial took their recent strong cash position and leveraged that into building out a retail footprint that I think was a good investment. Partly for all the advantages above, and partly as the cannabis market in Canada is still growing and to capture the largest share requires organizations to think very big.
- As Sundial purchases Inner Spirit, will we see the opposite happen with large predominantly retail organizations invest more in development and distribution of their own private label products?
- Will this model of brand combined with retail last longer term as the market matures, or will organizations be forced to pick a lane: CPG or retail?
- Cannabis is unique, but will we see traditional retail and CPG learn from this dynamic category and begin to try new and unique strategies to spur growth in a time of slowing sales?
