Best companies will prevail as CBD market goes through painful winnowing, CEO says
Jason Mitchell, ND, CEO of HempFusion Wellness, said the market is plagued with too many low quality products, an oversupply on the raw material end and a mismatch between extraction capacity and demand. Hovering over all of that is the continuing regulatory uncertainty.
It has made for a market that at the moment is flat at best and may be declining, he said. Still, Mitchell said he thinks the future is bright for his company and that the market will ultimately swing to the benefit of the sector as a whole.
Raw material hangover
Starting with the supply of raw material, Mitchell said that there was a significant amount of misinformation as to how fast demand would grow and how much money there was to be made. Hemp cultivation was going to ride to the rescue of American farmers, and that enthusiasm led to some poor decision making, he said.
“People had such a pie in the sky view of what was going to happen,” he said. “Without some serious change on the regulatory front you are limited in where you can sell your products.”
Mitchell said that some material from past years’ crops still remains to be sold, while farmers assess how much to plant for this year.
Mitchell said that constriction of the market can be solely attributed to the failure of the US Food and Drug Administration to move forward with hemp/CBD rule making, despite pressure from legislators and industry stakeholder groups.
The result, he said, is a market with too many brands chasing after an artificially restricted supply of customers. It’s a zero sum game in which growth for one brand means another must wither on the vine.
“If you have these limited places where you can sell your product, the cost per customer acquisition is a lot higher,” he said. “You have to pay to get eyeballs.”
Resisting the urge to over invest
Over investment has been rife throughout the category. Within the state of Colorado alone several extraction facilities from 50,000 square feet up to 400,000 square feet have come online in recent years ready to supply a demand that has yet to materialize.
Mitchell said pursuing a strategy of careful investment means HempFusion Wellness is on a trajectory of rising growth whereas the bill is starting to come due for some companies that spent too much at the outset.
“We tried our best to never over produce. We tried out best to keep costs under control,” he said.
Mitchell said his company has pursued a strategy of building retail partnerships with topical CBD products, which major retail chains are willing to carry. For most major retailers ingestibles are still off the table unless and until FDA finally decides what to do.
“What we have done as a company is we are going to continue to build on the success we have had in brick and mortar. We are now in more that 18,000 retail locations,” he said.
Mitchell said in one retailer his company’s products were housed in a special end cap display that shelf space built in to house the company’s ingestible products once the regulatory picture clears.
We did more than $12 million in business last year and we grew more than 155% in the third quarter. Our direct to consumer business accounts for about one-third of our overall business,” he said.
Ultra low THC source material
Mitchell said his company sources its hemp from certified growers in Eastern Europe who have decades of experience with the crop. They contract to grow a selection of five different strains that have been registered in the EU and verified for their ultra low THC levels.
That’s a genetic legacy that’s hard to reproduce in newer strains that might have been developed from high THC stocks, he said. That’s one of the reasons that crops running ‘hot,’ or ending up with too much THC, is an ongoing problem here whereas it is not a concern in Europe, he said. (To be in compliance with federal law an ‘industrial hemp’ crop must have less than 0.03% THC by dry weight.)
A continuing issue in the industry, Mitchell maintains, is that the legacy of Reefer Madness days means there is still no way to import the seeds of those verified industrial hemp varieties into the United States. While he said he plans to grow crops in North America that won’t happen into the seed issue is rectified.
“Patience is key. We all have to wait on FDA. The big retailers have already vetted the brands that they want to be part of this,” he said.
“Nowhere in history has there been something like this, where one ingredient has been held back in this manner by the government. The red yeast rice issue was resolved in less than 12 months. It’s only because of its link its cousin marijuana that we are even having this issue,” he said.
“It is constraining companies like ours. I can’t build my business fast enough. I employ 50 people where I should be employing 200,” he said.
More opportunity for research
Among the things that federal regulatory clarity would bring would be greater freedom on the research end, Mitchell said. He said he believes CBD will ultimately be clinically proven to have pain management and other benefits.
In addition, he said he believes CBD will be shown to have synergistic benefits with probiotics. A large amount of the body’s endocannabinoid receptors are located in the gut. That sheds light on the strategy of HempFusion Wellness to market a line of probiotics under its wholly owned Probulin subsidiary.
Two booths at Expo
HempFusion Wellness will be highlighting their lines of full spectrum CBD topicals in ingestible products at Booth No. 3929 at the upcoming Natural Products Expo West trade show in Anaheim, CA.
The company will also sponsor an additional booth for Probulin, No. N604.