Big Box Stores Are a Costly Ticket to the Top for CBD Companies

May 13, 2019

By Chloe Aiello

From DSW and Saks Fifth Avenue to CVS and Walgreens, more retailers are jumping into the CBD game ー and it's attracting attention from the big dogs. Target ($TGT) and reportedly Walmart ($WMT) are among those big box retailers eyeing the CBD market. For major retailers, stocking trendy products like CBD could help them compete in a crowded market, but smaller, younger CBD companies could find the challenges of stocking on such a large scale prohibitive.

"It's kind of like, be careful what you wish for. You've just now expanded your market many times fold," said Ray Hartjen, retail expert and marketing director at RetailNext. "People are becoming aware of your product and definitely aware of your brand, but to get there, there's a lot of challenges ー and they are not inexpensive."

Executives from big box chains have been meeting with CBD companies, requesting samples and even designing shelf space in anticipation of jumping onto the bandwagon of one of the hottest trends in beauty and wellness, the New York Post reported earlier this week.

Christian Graversen, brand manager at CBD maker CBDfx, confirmed that his company has closed several major accounts ー although he would not specify which ones. The company, based just north of Los Angeles, produces an array of CBD-infused topical and edible products, as well as a high-end CBD skin serum, Rejuvediol. Graversen said that in the six years that CBDfx has been operating, the types of partners CBDfx supplies to have evolved from primarily "counterculture" outliers to increasingly mainstream companies.

"Instead of trickle down effect. It is kind of a trickle up. We started at the ground and slowly we built /[the industry/] and finally we are at the stage where we can have a conversation with the biggest guys in the industry," Graversen said.

What's Driving the CBD Boom?

CBD or cannabidiol, is a compound from cannabis that is prized for a variety of purported health benefits, as well as for not getting its users "high." Although regulations concerning CBD are still murky, the cannabinoid can be found in everything from coffee and vape pens to bath bombs and foot cream, following the passage of the 2018 Farm Bill, which legalized industrial hemp. Some topical products are even sold in select CVS, Walgreens ($WBA), DSW ($DBI), Saks Fifth Avenue, and Urban Outfitters ($URBN) stores, but Walmart and Target still haven't jumped in to make CBD certified mainstream.

The dubious regulations and lack of standardized product testing could be giving these retailers pause. Although legal, hemp-derived CBD is still subject to specific restrictions. The Food and Drug Administration, for example, has warned that putting CBD in food products and making health claims about it is unlawful ー at least until it decides on a more permanent course of regulatory action. The agency will hold a public hearing on May 31 to help determine future regulation of CBD and cannabis.

Risks aside, big retailers don't tend to be earlier adopters. But Hartjen said "it certainly pays to be one of the very earliest fast followers."

"It allows a brand to be known as a source of that trendy product. In the CBD space, if a collection of well-known, well-received products is made available at Target, consumers quickly learn that Target is the place for them to get the products they're hearing so much about," he added.

Plus, it gives them inroads into an industry that could hit $22 billion by 2022, according to a bullish estimate from the Brightfield Group.

Target did briefly stock CBD products from Colorado-based CW Hemp, the maker of "Charlotte's Web" oil, in its stores in 2017. Less than a week later, the company pulled the products from its shelves.

Commenting on the recent New York Post report, a Target spokesperson said "we're following the discussion, but currently don't sell any products that contain CBD."

"We'll continue to monitor as this conversation evolves to determine the right approach for Target and our guests," she added.

A Walmart spokesperson clarified that Walmart does not currently carry CBD products. CW Hemp declined to comment.

CBD Companies Face Scaling Challenges

For CBD makers the benefits may seem obvious ー exposure on the shelves of a Target or Walmart can take a brand from relatively obscure to a household name. But there can be significant challenges.

Margins, for example, are much slimmer when providing products wholesale to a Walmart, known for its low prices, or Target, compared with selling direct-to-consumer, Hartjen said. And those types of stores can be ruthless about getting what they want, when they want it. For a company unaccustomed to producing mass quantities of products on strict deadlines, these demands can be insurmountable.

"It's like that old joke about being a boat owner: the two best days of being a boat owner are the day you buy your boat and the day you sell your boat. And it's really kind of the same type of deal for small brands when they instantly get into contracts, and they expand their distribution to thousands of locations," Hartjen said.

Another sticking point is product knowledge. When companies sell to a mass merchandiser, they relinquish control of the retail experience. A brand can’t, for example, provide sales associates to teach customers about their products. For companies specializing in CBD, which is still a bit of an unknown to most consumers, that can be a big problem.

Peter Horvath is CEO of Columbus, Ohio-based cannabis and hemp branding company, Green Growth Brands. The Schottenstein family-backed company is influenced heavily by Horvath's decades of experience in retail at companies like American Eagle Outfitter ($AEO), and L Brands ($LB), which owns Victoria's Secret and Bath & Body Works. It made waves in February when it announced a partnership with Simon Property Group to set up kiosks in malls across the country that sell its Seventh Sense Botanical Therapy-branded, CBD-infused beauty and wellness products.

Horvath said he prefers kiosks or storefronts to shelf space in a mass merchandiser, because kiosks allow the company to stock far more products, and to curate a specific retail experience.

"In a mass merchandiser, I can't control how well stocked the shelves are. I can't hand product knowledge off to my consumer, whereas in one of my shops, I've got an advocate for the brand, I've got an advocate for the benefits," Horvath said. "If you want to stand out in a crowd you've got to be authoritative and abundant."

That doesn't mean Green Growth isn't pursuing a wholesale strategy to increase brand awareness. The company already sells its products in DSW stores, and Horvath told Cheddar the company is also in talks with other major retailers. In a March interview with Cheddar, Horvath said the company had fielded inquiries from brokers for Target and Kohl's ($KSS), and was "working on tests with" American Eagle Outfitters, Albertson's ($ABS), and Abercrombie & Fitch ー with which it inked a deal in May.

Horvath acknowledged working with major retailers is important for getting brand exposure, in spite of the costs and risks associated. But he emphasized that for Green Growth Brands, it is only "part of a bigger strategy."

"The business of wholesaling, you're building your business in small bites, a zillion small bites," Horvath said. "Mass merchandising can be part of the strategy, but the strategy unto itself from a financial perspective seems too limited to me. It's a lot of work for very low margins and a lot of small bites."