Business

Why weed brands love DTC sales

By Alex Halperin
Mar 18, 2022
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Frustrated by high taxes, complex regulations and a glutted market, this month a group of 20 Mendocino County, Calif. farmers launched a new business.

MendocinoCannabis.Shop enables the farmers to sell directly to consumers. The idea is to boost their margins and sidestep some of the problems that have made business so hard for smaller California brands.  

“We’re all trying to avoid being stuck into the wholesale box,” said Casey O’Neill of Happy Day Farms.  

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The farmers’ partnership is just one of the latest examples of brands seeking to bypass the frustrations and expense of working with California retailers. Brands also see DTC as a better way to connect with customers and harvest their data.

  • It’s not clear what market share DTC sales have gained, but conversations with several operators and ancillary businesses suggest the model is on the rise in California, where the super-competitive market and complex regulatory situation make them an attractive option. 
  • At the moment, DTC sales appear concentrated in California, but observers expect the trend to spread nationwide.

In the mainstream economy, e-commerce platform Shopify has made DTC sales a reality for more than 1.7M businesses worldwide.

  • Shopify, a Canadian company, supports weed sales north of the border.
  • In the U.S. DTC cannabis brands need to figure out their own tech solution. 
  • Since they can’t ship through the U.S. Post Office or UPS, they also need to have licenses, or partners with licenses, that allow them to deliver legally.

The variety of DTC models that have emerged aim to address the ways retailers can get between brands and their customers.

These include: 

  • Retailers make decisions like which SKUs to carry and which brands get prominent placement, based on their interests, not brands’.
  • In California, some retailers charge brands slotting fees.
  • Finally, retailers don’t typically share granular sales data with brands, making it difficult for the latter to understand their customer and build brand loyalty.

With DTC sales, by contrast, brands control their pricing, their narrative and a host of other factors. They also collect data about who’s buying their product — spend, purchase frequency etc. — which helps convert them into repeat customers.

  • “It’s really about owning your data and capturing leads that can service your whole ecosystem, said Matthew Peranick, COO at 420 Interactive, a marketing agency. 

“I don’t think the stores are doing customers justice,” Dean Hollander, CEO of Perfect Blends, generalized. The SoCal brand launched a DTC shop this week in partnership with delivery service Grassdoor.

Perfect recently received a patent for a process to preserve the terpenes in its blends. The company says this  innovation helps it produce more consistent products, but budtenders don’t always convey that to shoppers.   

Hollander said having their own shop gives them more flexibility to develop relationships with influencers, ambassadors and other partners, he said.

  • For example, until April 1, WeedWeek readers can get a 30% discount at the Perfect Blends store with promocode WeedWeek30. (WeedWeek is not receiving an affiliate fee.)
  • (A video of my conversation with Hollander and Perfect VP Brand Marketing Mo Isern can be found at the bottom of this story.) 

“Consumers increasingly know what they want and what they like,” said Evan Schneider, who recently left a position as SVP product and design at California delivery service Amuse. “As people become more knowledgeable, DTC is very complimentary to that experience.”

  • Last year he worked on the company’s first DTC launch, for Seth Rogen’s Houseplant brand. 

Schneider said DTC commerce can be especially attractive for brands offering big discounts, and those that traffic in scarcity, whether real or manufactured:

  • One success story he mentioned is 710 Labs, which allows fans to sign up for a twice-monthly release of its choicest products.
  • “The List” requires a minimum order of $300 and even so, the brand puts customers on a waiting list before they’re allowed to buy.

Ginger appears to be the only California platform which has gone all in on DTC. Compared with a delivery service partner, CEO Roie Edery said Ginger’s advantage for brands, is “I don’t have another line of business…where I take bigger margins, own the data or own the customers.” 

  • Edery compared Ginger to an advertising agency; it might work with several car companies, but it doesn’t compete with its customers by selling cars. “My north star is the brand,” he said.
  • Edery previously founded infused breath spray brand Click and co-founded delivery app Eaze,
  • Since launch in Q4, Edery, said Ginger has opened 10 operational DTC stores and is onboarding 32 more.
  • Ginger charges brands the greater of $30 or 40% of gross merchandise value per order. 

According to Edery, marketplaces which deliver within hours and have minimum order sizes around $50 invite low spending customers, and do little to build brand loyalty. 

  • Ginger, he said, has an average basket size of $150.
  • He attributes that to scheduled DTC sales nurturing a different consumer mindset, that of a “brand loyalist or brand loyalist in training.” In the long run, he says, that customer is likely to spend more on a brand.

Not all off California’s industry is sold on DTC as the wave of the future, however. Edery’s former company Eaze, for one, hasn’t boarded the bandwagon.

  • “Eaze is focused on ensuring customers have expanded access to a wide breadth of quality products and price points, which DTC options don’t always provide,” Rogelio Choy, CEO at Eaze said in an email.