Note: The CannaVator accelerator, which includes a 10-week online and in-person program, is accepting applications until August 15, 2016 for its Fall 2016 cohort. More details about the program and how to apply here.
Anyone paying attention knows that the cannabis industry is rapidly becoming a multibillion dollar industry—in spite of existing limitations and regulations. To learn more about the companies fueling this growth, we’re doing a series of profiles on the biggest names in cannabis, starting with Denver-based Dixie Elixirs, one of the most recognizable brand names in the cannabis industry.
As a Colorado state-licensed “Marijuana Infused Product Manufacturer,” Dixie offers a wide variety of cannabis-infused products, including mints, topicals, chocolates, and “elixirs” (or drinks), which are sold at dispensaries for both recreational and medicinal usage. As the company rides its momentum to five additional states beyond Colorado (Arizona, California, Nevada, Oregon, and Washington), I found time to speak with Tripp Keber, CEO of Dixie Brands, over the phone to learn more about his company and the overall industry.
“Infused products is the single fastest-growing segment of the industry,” said Keber, a self-described serial entrepreneur. “The consumption and adoption by both adult-use consumers and medical marijuana patients in the infused products category—including concentrates, topicals, edibles—is quickly going to outpace the sale of flower.”
“Flower” is the industry term for the buds of the cannabis plant, which people will usually ingest by smoking in a joint or pipe. A spokesperson for Dixie estimates that flower sales make up 60 percent of all cannabis sales today.
“The adult-use consumer has a voracious—truly a voracious—appetite for [cannabis],” Keber continued.
To satisfy that appetite, Dixie today offers approximately 175 SKUs (or unique products) over 16 different product lines representing five unique brands. On any given day, however, only 100 SKUs are active because some are seasonal, while others are retired from time to time.
Three of the top seven all fall within Dixie’s Synergy line, a variety of concentrates which are marketed as offering a “milder high with noticeable health benefits” because they contain equal amounts of THC and CBD. THC is primarily associated with cannabis’ psychoactive effects, as discussed in my last piece, which is why Keber believes the cannabis industry started out focused on THC-based products. CBD, with a wide range of therapeutic and medicinal effects, was alternatively seen as primarily beneficial to medicinal patients. But when THC and CBD are presented together they have a greater efficacy, according to Keber.
Notably, Dixie’s #1 selling product in the country as of June is the Synergy Relief Balm, a topical medication that Keber says “provides no euphoria.”
“We’re learning a lot about who the adult use consumer is, and more importantly, who he or she wants to be as this industry evolves.”
As mentioned above, Dixie also offers mints, drinks, chocolates, and other edible products. Or, as Keber calls them, “innovative delivery systems.” And they’ve even ventured into development of a pet wellness line.
“We don’t make a pot brownie,” he told me. “We don’t make gummies or anything like that. We try to be a little bit more advanced or consumer-focused.”
Profit margins and business models
Though the business itself may be challenging, Dixie’s business model is fairly simple: its products are largely distributed through state-licensed and regulated facilities that can legally sell infused cannabis products. The company says it currently sells thousands of products every month to hundreds of dispensaries across Colorado, California, and Arizona, with Washington, Oregon, and Nevada coming later this year.
Dixie doesn’t own any retail stores, and it has largely outsourced cultivation to other facilities. And while Keber says the company has no restraints in terms of supply chain or raw material sourcing, it’s very careful to evaluate its sources. (Read: no license, no deal.) Furthermore, Keber firmly believes that cannabis is already becoming commoditized.
I asked Keber about Dixie’s revenue numbers and profitability, but he wouldn’t get into specifics:
“All of our product lines meet a minimum and requisite margin, which I won’t talk about because that’s confidential,” he told me. “But we do have gross product margins we demand that are in many cases greater than 50 percent across all of our product lines.”
“We are a for-profit entity, so we have no qualms about admitting that we make money. In most cases for cannabis companies, 90 cents of every dollar of profit is reinvested. So there’s this misconception that we’re all getting rich. But the fact of the matter is, it’s an incredibly challenging industry with change around every bend in the road, so we need the intellectual horsepower and financial wherewithal to sustain these unexpected blows.”
As one specific example, Keber said CPGs (Consumer Packaged Goods companies) typically implement packaging or labeling changes once every 36-40 months. In the last 18 months, Dixie has changed its packaging three times, costing the company about a quarter of a million dollars each time.
“The Future of Cannabis”
To drive brand awareness, Dixie paints itself as a leader with its tagline: “the future of cannabis.” For Keber, that’s not just fluffy marketing language.
“The future of cannabis is really oil,” he said. “What is driving the growth of this industry is in fact the infused products category.
Besides its focus on what Keber sees as the high-growth sector of cannabis, Dixie claims to lead the industry with its packaging (child-proof, tamper-resistant, and resealable) and accurate labeling. Keber says they were the first to use an infographic outlining exactly what you get with “one dose” and how long an individual should wait between dosing. The company’s products are “triple lab tested” so the consumer or patient can be confident that they know what they’re taking.
“Americans are not known for portion control,” joked Keber.
Though Dixie is largely seen as a consumer brand today, the company was initially founded in 2009 to serve medical marijuana patients. But Colorado’s decision to repeal prohibition changed everything. Keber points to a 2014 study from the state of Colorado, which estimated that nearly a half million people over 21 years old, or approximately nine percent of the population, use marijuana at least once monthly. In the three-plus years before legalization of cannabis for recreational use, however, there were only 120,000 medical patients.
Because Dixie’s consumer base essentially tripled overnight, Keber says, “It was like drinking out of the fire hydrant. Forget about the fire hose. We were making more money in an eight-hour period than we were in previous months.”
This enormous hockey stick growth, unfortunately, meant that the company lost focus and forgot about the patient. Keber told me that since the end of the first quarter, the company has tried to change that by working on innovative solutions for the medical cannabis users.
Factor in enormous growth for its recreational use products, the still-large opportunity in the medical use area, and the massive costs associated with operating a CPG brand, and you know you're going to need extra capital. Dixie confirmed to us that they're planning a fundraising round for sometime before the end of the year, and Keber suggested in an interview with Bloomberg that the company's valuation could rise significantly since the last time it raised funds.
Challenges and opportunities
Looking ahead, I asked Keber what he considered the biggest challenge for Dixie and the cannabis industry for the next year.
“The single greatest challenge and opportunity is banking,” said Keber flatly. “The fact of the matter is that 85% of the industry is banking in cash. We’re a wholesaler, so we deal with 1,000 customers in any given quarter and most pay in cash.”
Because they have banking, Dixie is in the minority, but Keber estimates only a dozen banks in the state of Colorado do business with cannabis.
“So you can imagine the majority of people are coming home at night trying to figure out where to stuff the money.”
Of course, beyond banking, there’s the more obvious challenge posed by the federal government. So, as I always do when speaking with cannabis entrepreneurs, I had to ask: What happens to Dixie if the DEA reschedules cannabis to Schedule II?
Keber, like most cannabis entrepreneurs, can only respond with overflowing positivity by pointing to what has been happening in the state of Colorado, where cannabis for both medicinal and recreational uses has been legal since 2012.
In May 2014, the Marijuana Industry Group reported that the then-fledgling industry had already created upwards of 10,000 new jobs in Colorado. More recently, a 2016 report by the University of Colorado Leeds School of Business said employment growth in the state was outpacing the rest of the nation. Looking beyond companies directly involved in cultivation, manufacturing, or retail distribution, Keber estimates that the cannabis industry has created more than 30,000 jobs since legalization.
“On any given day, I’ve got 10-15 vendors here,” he said. “I’ve got guys replacing all of my sprinkler lines. I can’t take credit for that guy’s job but we want our facility to look as nice as the one next door.”
It’s not just jobs, but taxes too. In the first year of legalization, the state of Colorado collected $53 million in tax revenue from marijuana. And those numbers are growing: in just the first five months of 2016, the state raked in close to $71.4 million in taxes. As a result, Keber says that instead of millions of dollars going to drug cartels, you have new schools being built.
Still, the industry is only scratching the surface. Though Colorado could likely surpass $1 billion in sales this year, Ackrell Capital, forecasts that the total U.S. cannabis consumer market (including pharmaceuticals) could top $100 billion by 2029, according to its U.S. Cannabis Investment Report 2016.
Factoring in the growing medicinal uses of cannabis, further legalization for adult use across additional states, the jobs that would be created, plus the bounty of money that would be saved (and generated) by the government, “you have a massive win for our country,” argues Keber.
“So I can make money, pay taxes, create jobs, and—oh, by the way—I can ****ing help somebody?”
For Keber, his fellow cannabis entrepreneurs, and most cannabis users, it’s a no-brainer.