Trying to Grow Your Cannabis Business? Why Licensing May Be the Answer

Cannabis brands are having a tough time growing. After experiencing a 30% jump in annual sales from 2020 to 2021, the industry saw a pitiful 1% growth in 2022 according to the Brightfield Report. Given that several states opened up for business in 2022, the stagnation within the industry is even more troubling. 

From the outside looking in, things seem to be coming up roses. Big brands like CANN make cannabis look approachable for all consumers, and both the Democrats and Republicans have their own plans to make federal legalization a reality. 

But even CANN, with all of their money and Goop approved chops, is struggling to turn a profit. Thanks in large part to high taxes, a competitive illicit market, and the inability to advertise, cannabis brands large and small are finding growth trickier than ever. 

For some brands though, there are possibilities to pop up in new markets without huge investment money or even startup costs. Another beverage brand, CQ (formerly known as Cannabis Quencher), has been able to stake a claim on the East Coast and in the Midwest by embracing a royalty based licensing model. This model allows for a brand in say, California, to enter the Nevada market by using a local manufacturer to create the original California products. In categories like beverages (as opposed to flower or pre-rolls) the final Nevada product is all but identical to the original California one. The Nevada manufacturer will then give the California brand a portion of sales via royalties. 

The boon of this model goes beyond the pocket cash of royalties. The same California brand can not only claim a foothold in a new market, but also a higher market share overall - a big win for any brand who may want to keep the option of investment open to them. With little to no startup costs and without having to navigate the complicated legal system of a new state alone, brands can expand safely and with relative ease. “The main benefit of this model is that it allows a cannabis brand to grow quickly and enter new markets and product categories without a lot of upfront capital,” says says Ami Ikemoto Executive, VP of 22Red, “It allows brands to focus on what they are good at like marketing and cultivators/distributors/manufacturers to focus on their strengths like delivering a good product on time and at the right price.”

For a legacy brand like CQ, the model has been especially fruitful. They’ve seen double digit growth in their new markets of Massachusetts and Illinois, two states they just launched in the past calendar year. Their legacy and choosing the right partnerships, has been a huge key to their success. CQ was actually California’s first cannabis beverage when they launched under the banner of founder Kenny Morrison’s Venice Cookie Company (VCC). Since opening their doors in 2008, they’ve seen it all and managed to survive and even grow in the tough current cannabis market.

“We’ve focused.” says Morrison. “We’ve gone from making baked goods and other edibles in  multiple SKU’s and having more than 50 employees to streamlining our team and focusing on beverage.” As the first ever cannabis beverage brand to hit California dispensaries, Morrison’s name has gained immense credibility within the industry. However, he is not relying on legacy alone to attract manufacturers in new states. He makes sure to be an active partner and keeps the CQ name fresh and relevant. Morrison noted, “We rebranded last year to keep pace with the change we’ve seen and the future we anticipate. And we constantly evolve the CQ lineup as we expand, learning from every quirk of every new territory.” 

They show no signs of slowing down and are set to launch in Michigan, Canada, and Arizona before the end of 2023, while actively seeking additional partnerships in other states. “An asset light licensing model has allowed us to stay nimble and small, focusing on Brand and Product rather than Operations. Ops in cannabis is much tougher due to the oppressive regulatory environment. We did it for over a decade in regulated and unregulated states so we know what it takes to pull it off, but now we help our partners conquer that in more of a consultative role, rather than strictly hands on. This model plays to our strengths and keeps things fun for us, which is important when our job is connecting with consumers.” 

For a brand that is seeking to achieve similar success by embracing royalty based licensing, there are characteristics to look out for with a potential manufacturing partner. The obvious traits, like having a strong business acumen, adaptability, and reliability go without saying. For these types of partnerships though, equally paramount qualities include an experienced sales team, consistent quality and an aligned vision plan for the partnership. “It is critical to understand your partner’s financial standing and reputation in the industry.” says Ikemoto. “If these two elements are not in good standing, they can quickly tarnish your brand.”

There are responsibilities for a brand to handle as well on their side of the agreement. Beyond building reasons for the customers to stay captivated with the brand, the marketplace climate requires that brands support their partners with PADs, budtender training and incentive programs, and frequent promotions. What used to be strategic marketing for brands is now a given and the bar to conduct business. Ikemoto adds, “Be engaged with the product quality and services that your licensee is putting out into the world. Make sure you have approval processes in place. Without these you can lose control of your brand position and the trust you have established.”

The best partnerships between brands, manufactures, cultivators, and distributors are ones that work in tandem. Cooperation is crucial for survival. While 2022 was a trial for most cannabis companies, the market is predicted to nearly double by 2028 to 50.7 billion. With new markets opening up and potential federal legalization on the horizon, certain obstacles may fall away for big MSOs and craft cannabis brands alike. Whether using investor money or finding ways to make the market work for smaller brands, both categories have paths to success in 2023. Since the seal of legalized cannabis has already been broken, despite numerous challenges, the industry has continued to break new ground and defy the odds that have held it down in the past.