New report estimates up to two-thirds of brands could fail despite the category’s positive long-term outlook
KEY INSIGHTS
- CBD is still a hot space, with sales expected to grow from $5 billion in 2020 to $17 billion by 2025.
- Oversaturation in the CBD market has ramped up competition while watering down profitability.
- The FDA continues to keep CBD on a short regulatory leash, limiting its retail options.
There was plenty of buzzworthy news coming out of the CBD industry in 2019—namely its staggering 562% growth.
But that number was too stratospheric to last, even before the Covid-19 outbreak. And since the pandemic hit, the cannabis-adjacent category has taken a nosedive, with negative growth and flat revenues for at least six straight months, according to research firm Brightfield Group.
At least half or two-thirds of those 3,000 brands will fall out by the end of the year. To call this a volatile period would be a tremendous understatement.
Bethany Gomez, managing director, Brightfield
CBD companies, like many other brands, are continuing to grapple with retail disruption and cash-strapped consumers. Those challenges, coupled with complicated regulatory issues, have created a perfect storm, according to Brightfield’s managing director Bethany Gomez. The upshot: Some of the 3,000 brands now crowding the space are not likely to weather it.
“2020 is shaping up to be an extinction event,” Gomez said. “At least half or 2/3 of those 3,000 brands will fall out by the end of the year. To call this a volatile period would be a tremendous understatement.”
But the future isn’t all doom and gloom, said Gomez, whose firm takes bi-annual deep dives into cannabis and related industries. There’s growth on the horizon, likely to be spurred by product innovation, sophisticated rebranding and clever digital marketing.
Below are some of the key findings of Brightfield’s U.S. CBD Market Report for mid-2020:
CBD is here for the long haul
The industry has been battered during the public health crisis, with sales slipping as specialty retailers closed their doors. Consumers also lost their jobs and much of their disposable income during this period of record unemployment.
Even so, the category is expected to bring in $4.7 billion in sales this year. That’s less than previously projected but still up 14% from 2019. By 2025, that figure will jump to $16.8 billion, according to Brightfield’s estimates.
“This category grew out of nowhere,” said Gomez, citing as a key driver the 2018 Farm Bill, which legalized hemp as an agricultural commodity and removed it from the federal controlled-substances list. “After the Farm Bill passed, the floodgates opened.”
Hemp-derived CBD is made from the sort of industrial hemp used for sourcing fibers and seeds, meaning it contains very little or none of the psychoactive compound THC that historically made cannabis popular as a recreational drug. The 2018 Farm Bill created a legal distinction between hemp and other forms of cannabis.
About 15% of Americans over age 21 used some form of CBD in 2019, when distribution exploded to nearly 100,000 retail outlets, ranging from Whole Foods and Walgreens to Urban Outfitters and Sephora.
It might be difficult to recruit new customers beyond this early surge, Gomez said, but at the same time, Americans are reporting significant, elevated levels of stress. Consumers who have already tried or regularly use the non-psychoactive cannabinoid products could increase their purchases. The top reason cited for using CBD (by 42% of fans, per the study) is anxiety.
Will startups keep pace as the industry matures?
Startups dominated the space in 2019, in sheer volume, but many of their products were decidedly first-generation, Gomez said.
That situation has evolved, with both emerging and established brands investing in R&D and innovating their formulas. They’re improving taste and texture, mixing in ingredients like melatonin and turmeric and adding vitamins and cannabis compounds such as CBN. They’re also overhauling their packaging and branding.
Bucking the streamlining trend in traditional CPG, many CBD marketers have launched new products and line extensions this year to try to appeal to a broader audience. But with shelf space tightening, Gomez predicts that only the strongest will survive. Whether that includes products from legacy CPG companies like Colgate-Palmolive, GlaxoSmithKline and Church & Dwight, whose CBD offerings popped up in the past 18 months, is an open question.
2020 will cull the herd
Cannabis has proven to be recession proof (there’s actually been a mini-green rush since the pandemic started), but the same can’t be said for CBD.
Aside from the twin tornadoes of high unemployment and shuttered retailers, CBD brands had already seen their margins thin and their revenues drop, mostly due to an oversupply of hemp. That’s caused brands to offer sizable discounts, like buy-one-get-one-free deals and 40% markdowns, to try to stand out in the jam-packed space.
“The market has become oversaturated,” Gomez said, “and it’s difficult for anyone to make money.”
And a recent study from the U.S. Food and Drug Administration hasn’t helped the situation. It found widespread mislabeling among the 150 CBD products examined, battering consumer confidence in the category.
This year, a lot of brands won’t be able to raise capital or get to scale. They’ll be gone, and that will benefit the large companies.
Bethany Gomez, managing director, Brightfield
For those reasons, Gomez said she expects small brands with boutique distribution and limited awareness to go out of business. Winners in that scenario will be the heavyweight players like Charlotte’s Web, Green Roads and Lazarus Naturals.
“When growth is over 500% like it was in 2019, it’s a lot easier for all boats to be lifted,” she said. “This year, a lot of brands won’t be able to raise capital or get to scale. They’ll be gone, and that will benefit the large companies.”
Brand loyalty will determine survival
Pre-pandemic, about 29% of CBD consumers said they bought the products online, and the number jumped to nearly 50% (and higher among millennials) after Covid-19 lockdowns hit in March, according to Brightfield.
Given that data, brands with frictionless ecommerce and strong digital marketing will pull ahead, said Gomez, who noted that “now is a great time to build brand loyalty.”
Companies will need to bulk up their direct-to-consumer strategies and advertise in unexpected ways. Among a few examples that have caught Gomez’s eye: CBDistillery targeted baby boomers with buys on conservative radio shows, and CBD Medic leaned into sports via alliances with PGA’s Bubba Watson and the NFL’s Rob Gronkowski. Also, Medterra has been a strong digital marketer, she said, geofencing to help boost its retail sales and linking with influencers to reach millennials.
The FDA is not CBD’s BFF
The FDA, charged with federal oversight of the CBD category, does not allow the cannabinoid to be marketed as a dietary supplement or added into food.
That’s why chains like Rite Aid, GNC, Kroger, Ulta and CVS carry mostly topical CBD products such as transdermal patches, skin care and body lotions. Not stocked among their plentiful CBD displays: Tinctures, gummies and other “ingestibles,” which make up the largest piece of the revenue pie for CBD brands.
And retail behemoths like Walmart and Target probably won’t sell CBD at all without the FDA’s blessing.
The agency won’t be won over easily, if this summer’s research is any indication. The FDA released a study in July that found the majority of brands it examined were mislabeled, either containing less or more CBD than promised. (The same was true of the THC content, which is zero in some brands, minimal in others).
The report gave some credence to the criticism that the CBD industry is rife with snake oil, Gomez said.
Before it will set up a regulatory framework, the FDA has said it needs more data to be able to judge CBD’s safety. With more pressing pandemic-related matters on its plate, no movement is expected until 2021.
“There’s still a lot of resistance from retail about carrying the products, which limits companies’ growth,” Gomez said. “And without that FDA guidance, there’s not much quality control, which makes it very frustrating for legitimate brands.”
