💪 Just Ship It

Here’s a chart I’m not sure I’m allowed to use:

It’s the percentage of total revenues coming from Nike’s direct-to-consumer business, over a decade. Be soothed by its consistent 2-3% growth year over year. Bask in its deliberate nature.

Nike clearly did this on purpose. Adidas is doing it, too - they’ve set a target to derive 50% of revenues from D2C by 2025. And it’s not just apparel jumping into the fray; Pepsi, razor manufacturers, mattress vendors - and yes, cannabis brands - are also foregoing the retail layer.

❓ But…why direct-to-consumer?

Traditionally, a brand makes a product, markets it, and sells it wholesale to the retailer. The retailer merchandises and sells the product, either digitally or in a brick and mortar location, to the customer. The retailer marks up their wholesale cost to make their margin.

To the brand, there is a big, giant benefit in the traditional model: outsourcing physical retail. Retail is expensive.

But there are several drawbacks:

• You have to negotiate wholesale prices with retailers who lean heavily on discounts to compete

• You don’t have direct access to your customer or end user

• You can’t collect as much data

• Your touch-points with customers are limited to pre-purchase intent interactions

• Most importantly - you are merchandised right next to your #1 competitor

Hope that unique packaging pays off…

Enter the eCommerce Explosion

Over the last twenty years or so, we - the proud, American eCommerce shoppers - have been in training. We have waited weeks for a new book as the supply chain became efficient. We have endured invasive cookie policies on all of our favorite websites, as well as the series of ads they initiate. We have dealt with arduous return processes, printing return labels and being forced to steal Scotch tape from our children’s play areas so we can get the damn thing on the box before UPS gets to our house.

We are battle-tested.

And most recently, we were guinea pigs for brands that realized three things:

1) Distribution infrastructure has gotten so efficient, brands don’t have to rely on retailers at all

2) Brands can now leverage extremely targeted advertising via Facebook or Instagram, speaking almost 1:1 to their core audience

3) Brands can own their entire retail experience - with no competitors as far as the eye can see - online

👋 Welcome to direct-to-consumer land

Enter direct-to-consumer, a high(er)-margin play for brands, wherein they market and sell directly to the customer, eliminating retail altogether.

We have discussed the premiums to a D2C model: increased margin, good data, good direct relationship with the customer, no competitors in your retail environment - but D2C models are not easy to execute. They require brands to be good at everything, including last-mile logistics and returns. For a vivid example: brands normally package up big shipments to be sent to retail, but now they are required to package and ship small, individual parcels. Totally different ballgame.

From Adidas:

🌱 What about cannabis?

Cannabis brands, from flower to suppository, are not immune to the allure of D2C models; in fact, since some cannabis retailers are not shy about demanding slotting fees or marketing dollars, and selling via stores cedes much of the actual selling to budtenders, many cannabis brands find D2C quite compelling.

But, wouldn’t ya know it, cannabis is largely regulated like alcohol and requires brands to use distributors and sell through retail. The three-tier system.

(*Note: some markets, like Florida, actually require a retailer to own the whole supply chain - or be “vertically-integrated” - so they’re already going D2C. We’ll leave vertically-integrated markets to the side for the remainder).

So, as is often the case, the cannabis industry requires us to coin a new term and build things in a creative way:

🏬 Enter: inDirect-to-Consumer (i2C)

This term describes a model where a brand makes a product, markets it, and directly collects orders, which are then fulfilled by retail partners. I first described it here.

It is relevant for cannabis brands who cannot secure retail or delivery licenses, and must rely on partner retailers to actually get goods in hands. The major benefits of D2C are still there - direct relationship with customers, no competitors in your purchasing environment, good data - but the nitty gritty of the actual transaction is still outsourced to retail partners.

And, this is not a hypothetical situation. We have about 200 brands doing it, successfully, today (Wana, Pax, Papa and Barkley, etc.).

Cannabis brands see the same benefits that Nike does - we just have to be a bit more creative about it.

📚 tl: dr

• Nike and others are focusing on direct-to-consumer models, because they can achieve higher margins and better data

• D2C models require brands to be good at everything, from making to marketing to last-mile

• Cannabis brands cannot legally sell directly to their customers, but they can facilitate orders to be fulfilled by partner retailers (indirect-to-consumer)

• It is Tuesday