At the end of July, the Brightfield Group, a leading consumer insights and marketing intelligence firm, released their 2020 US CBD report on the status of the CBD industry, especially in the wake of the COVID-19 pandemic. The report highlights trends, challenges, and how the industry has responded to the global health crisis. Also noted are key areas of market growth that present considerable opportunities within the industry.
CBD vs. Marijuana
It is important to note that cannabidiol, commonly knowns as CBD, is derived from the hemp plant which is a cousin to the marijuana plant, and is federally legal pursuant to the 2018 Farm Bill. By contrast, marijuana and marijuana-related products, which contain delta-9-tetrahydrocannabinol (THC), are classified as a controlled substance under the US Controlled Substances Act.
This article focuses on the CBD industry.
Overarching themes for the year
Shelter-in-place orders and store closures have introduced both challenges and opportunities for CBD companies. For example, many retailers selling CBD products now must overcome the loss of revenue as their stores temporarily close or shift exclusively to curbside pickup and delivery.
Even for CBD specialist retailers and smoke shops that remain open, there have been steep declines in sales as social distancing guidelines and consumer concerns about the virus keep shoppers at home. In addition to closed brick and mortar experiences, the U.S. is in the midst of the highest unemployment rate since the Great Depression. As of July 14, 2020, over 30 million Americans were receiving unemployment benefits.
Impact of COVID-19
In perhaps the biggest takeaway from the report, experts project the US CBD market to reach $4.7 billion in sales in 2020, with 14% growth from 2019. The growth is less than was expected at the beginning of the year, but that was before we understood the impact of COVID-19 on the national and global economy. Additionally, historic unemployment levels for consumers, stay-at-home orders, temporary store closures, and inaction by the Food and Drug Administration (FDA) to clarify rules and regulations have all constrained growth.
However, in the latest report, the Brightfield Group estimates the total US CBD market could reach $16.8 billion by 2025. Despite the market challenges experienced this year, the base of US CBD consumers is still growing strong. Consumers adapted in the second quarter. Not only did online CBD purchases grow to 47% (compared to 29% in Q1), but the total amount of consumers using CBD on a daily basis also increased by 6% from Q1 to Q2 in 2020.
Trends to watch
In a year that has been anything but normal, there have been some key emerging trends to watch in the CBD industry.
1. Increased affordability
CBD products have gotten cheaper, and it looks like it will stay that way. Price wars, a supply surplus, and a pandemic have driven down costs of the once-premium products that contain hemp-derived CBD. Due to increased affordability, there has been an increase in CBD consumers and consumption rate. In fact, the Brightfield report explains that nearly 40% of users increased their consumption this year.
An oversupply of hemp in recent months led the aggregate assessed price for hemp CBD biomass to drop dramatically from $38/lb in April 2019 to $8.10/lb in April 2020. In addition, major CBD companies have installed more efficient hemp extraction equipment and expanded manufacturing facilities, resulting in lowered production costs. The decreased cost to produce CBD products has resulting in reduced prices in an attempt to reach middle-income consumers. Overall, the increased affordability is also helping drive demand.
2. CBD isn’t just for humans
There is a burgeoning market segment benefiting from the pain and alleviation properties of CBD – our pets. The pet market for CBD is beginning to flourish and experts predict 2020 pet CBD sales to reach $426 million. The Brightfield report even predicts that by 2025, as more clinical data becomes available and policies evolve, pet CBD will make up a $1.1 billion market. On the market today are tinctures, treats, capsules, and topicals specifically designed for animals.
It is clear, pet owners are buying in. The potential for the pet CBD market has drawn attention from big pet-product players like Pedigree, Eukanuba, 31 Whiskas, Iams and Purina. Chains like Petco and PetSmart and specialty chain Bentley’s Pet Stuff, meanwhile, have already been selling CBD products. And, while dogs have been the main market target until now, products are being developed for cats, birds and horses.
3. Food & beverage focuses on wellness
From a US federal perspective, the Food and Drug Administration (FDA) has only approved one CBD product which is a prescription drug to treat two rare and severe forms of epilepsy. Otherwise, it is federally illegal to market CBD by adding it to a food or labeling it as a dietary supplement.
With a worldwide health crisis at hand, many consumers have turned their focus to food & beverage products that promote wellness and immunity. Thus, immunity support is a key area of focus in 2020 for CBD companies. Particularly, CBD beverages have been a focus for consumer packaged goods companies. For example, hot cocoa mixes & coffee beans with CBD and CBD-infused sparkling teas have hit the market this year.
However, we should note that state regulation of CBD food and beverages is still in flux and it remains unclear whether the FDA will ultimately allow the use of CBD as a food ingredient. States including California, Georgia and Maryland have remained steadfast in adopting the FDA’s current position that CBD cannot be added to food or beverages, but in the past year, several states moved forward with their own regulatory frameworks for food and beverage products containing CBD. A notable trend among states is the movement toward comprehensive testing and labeling requirements, as well as mandatory registration of products and the distributors and retailers that sell them.
4. E-commerce is key
When it comes to retail channels, e-commerce has emerged as the largest distribution channel for CBD products in 2020. In 2019, e-commerce sales made up 32% of CBD sales and this number has now grown to 39% in 2020. Online sales have been driven by store closures, stay-at-home orders, and general concerns about COVID-19, as well as the reality that many leading brick & mortar retailers are waiting until they get the green light from the FDA before stocking ingestibles. Overall, 45% of CBD consumers surveyed in June 2020 have moved their CBD purchases online because of the coronavirus crisis.
5. Evolving competitive landscape
The US CBD market has also undergone significant change this year. Because the market is seeing both expansion and consolidation in 2020, the top 5 brands have technically lost market share but still maintain the majority piece of a now larger pie. The industry is primarily influenced by CBD-only companies along with cannabis companies, supplement brands, Canadian Licensed Producers (LPs), and new entrants from the consumer packaged goods space.
Key growth drivers for the industry
As we move forward, some key initiatives will help push the growth of CBD.
1. Expanded distribution channels
Starting in 2019, more and more retailers – including larger chains – announced both in-house products and partnerships with CBD brands. These retailers range from personal beauty stores like Sephora, and Ulta, to food & beverage retailers like Whole Foods, Coca Cola and Anheuser Busch InBev, to major chains like Walgreens, Rite Aid and CVS. In the summer of 2019, Kroger, the nation’s largest grocery chain, began selling CBD products at over 1,000 stores across the country. Effectively, it introduced topical CBD products like oils, balms and creams to mainstream shoppers. Since then, Kroger has quickly become one of the largest brick and mortar CBD sellers by footprint, with plans to become the go-to-hub for large CBD producers.
Due to the vast array of products incorporating CBD, retailers are willing to take the plunge and hope to score on a large piece of the ever-growing CBD pie. However, some risks do remain for retailers as the FDA establishes official guidelines for CBD manufacturers. As a result, some of the larger retailers are likely to stick with topical products until the FDA provides some clarity.
2. Product variety and evolution
Naturally, the diversification and sophistication of CBD products appeals to a much broader consumer audience beyond cannabis and natural food store consumers.
In contrast to other industries, CBD companies and brands are rolling out innovative products at a high pace to draw in new consumers while holding the interest of existing users. New functional ingredients can help bring new consumers to CBD, especially as natural ingredients complement the many uses of CBD and help consumers better understand how to incorporate these products into their daily or weekly wellness habits. Featuring these products at accessible price points can help drive incremental CBD sales for convenience operators and encourage routine purchases. Those CBD companies that have pushed innovation in 2020 have been rewarded with increased brand awareness and sales.
Immunity support is a key area of focus in 2020 for CBD companies as consumers seek ingredients that support immune health such as elderberry, Echinacea, and vitamin C during the coronavirus pandemic. CBD companies are also beginning to incorporate minor cannabinoids including CBG (cannabigerol) and CBN (cannabinol) alongside CBD to produce the “entourage effect” where the compounds work synergistically to enhance the effects of each component.
In addition, pharmaceutical and consumer packaged goods companies continue to enter the CBD market and spur greater product innovation.
3. Strategic marketing
As noted above, a strong e-commerce presence is especially important for CBD companies during this time. Many consumers reduced store visits due to stay-at-home policies and general wariness about visiting physical stores. As a result, nearly half (45%) of CBD consumers surveyed in June 2020 moved their CBD purchases online. Millennial shoppers lead this trend, with 54% reporting a switch from brick and mortar store to online. Their usage and spending also increased.
While online sales increased dramatically in the first half of 2020, CBD market leaders are still making efforts to expand in brick and mortar retailers to set up future success and broader brand awareness. CBD companies with extensive direct-to-consumer (DTC) experiences, a database of e-newsletter subscribers, and a large social media following have been critical for consumer outreach and interaction, as well as sales through brand websites.
In addition to having DTC capabilities, CBD companies with a well-recognized brand and a strong digital marketing strategy are likely to fare best in this challenging environment. During crisis and economic upheaval, consumers seek out familiar and trusted brands. This is true across the board for a variety of different types of products. As consumers continue to minimize trips to stores or choose to buy online and pick up in stores, CBD companies will not have the benefit of relying on employee recommendations at CBD specialist retailers and health food stores and point-of-purchase materials to influence consumers. Instead, CBD brands should maintain a direct connection with consumers and provide education about CBD through emails, blogs, and social media. Brands prioritizing retail penetration must reevaluate as online channels grow stronger.
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Disclaimer: This material has been prepared for informational purposes only, and is not intended to substitute for obtaining accounting, tax, or financial advice from a professional tax planner or financial planner. All information is provided “as is,” with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information.
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