CBD & Cannabis Categories Look for Traction

NATIONAL REPORT — With passage of the 2018 Farm Bill and legalization of recreational marijuana across half the country, marketers thought cannabis and cannabidiol (CBD) products would become as commonplace in convenience stores as beer and tobacco. But a lack of federal guidelines for CBD consumables, cannabis' illegality at the federal level and unfavorable financial laws have made major retailers and suppliers reluctant to enter these segments and this has slowed growth of both areas.

CBD sales declined from a high of about $4.8 billion in 2021 to $4.2 billion today, according to Brightfield Group's report, "Striving to Thrive in U.S. CBD." By 2028, the market researcher predicts that CBD sales will only reach $5 billion sans regulation; with regulation, sales could exceed $10 billion.

Cannabis market intelligence firm BDSA predicts U.S. legal cannabis sales will grow from $29.6 billion in 2023 to $45 billion by 2027, representing 80% of global sales. Experts believe growth could be higher if financial and other regulations were less stringent.

But there are bright spots. While the most inroads are being made through independent retailers, larger convenience channel players such as Jacksons Food Stores, Yesway, Sheetz Inc. and Alimentation Couche-Tard Inc./Circle K have partnered with cannabis suppliers and/or successfully introduced CBD products, many from smaller vendors.

"You're seeing mainly independent c-stores marketing CBD products," said Alex Morrison, manager of business analytics at Cadent Consulting Group, based in Wilton, Conn. "It's definitely harder for a national, mainstream chain. I think they're worried about brand recognition, consumer trustworthiness and regulation. And cannabis dispensary partnerships aren't as far along as in Canada due to the regulatory environment."

Financial Risks & Obstacles

Operating U.S. dispensaries is costly. In addition to myriad regulations, it is illegal for major banks to fund cannabis businesses, and Section 280E of the Internal Revenue Code forbids companies from deducting ordinary business expenses from gross income associated with the "trafficking" of Schedule I or II substances. On the consumer end, Mastercard announced in July that it was banning cannabis purchases on debit cards.

"Partnering with dispensaries side by side is a developing situation," said Agustin Rodriguez, partner at Atlanta-based law firm Troutman Pepper. "There's many compliance costs. You must get a license, monitor inventory, and track and trace it throughout the system from cultivator to retail sale. This requires special software. There's some small banking institutions offering financing, but there's costs. You end up with lots of cash."

Matt Zehner, insights manager at Brightfield Group in Chicago, said such issues seriously hinder profitability. "Growth strategies aren't paying off in cannabis and CBD. Financial risks are keeping companies out. Some are burning through so much money. Hype seems to outweigh returns. Companies are wary to enter the space without federal regulation."

U.S. Sen. Jeff Merkely (D-Ore.) wants to assuage the financial situation. In April, the federal legislator introduced the SAFE Banking Act of 2023 (S.1323), which would protect federally regulated financial institutions serving state-sanctioned marijuana businesses, letting them lend money.

"The bill is moving its way through Congress; it's been introduced three times," noted Brendan Mitchel-Chesebro, analyst/content manager at BDSA in Louisville, Colo. He echoes that the current banking situation "adds much risk."

Circle K has entered colocation dispensary partnerships, although it hasn't opened these operations as of press time. The chain is partnering with Green Thumb Industries of Chicago, owner of RISE Dispensaries. Plans call for 10 RISE Express medical cannabis stores adjacent to 10 Circle K stores in Florida.

Fort Worth, Texas-based convenience store retailer Yesway is also "evaluating opening dispensaries in states where cannabis is legal," said Alan Adato, senior merchandising and procurement manager. He did not provide a specific timeframe.

In Need of Standards

The CBD business is more developed in the convenience channel, although just a handful of larger retailers are participating. Altoona, Pa.-based Sheetz began offering CBD products at select locations in 2019, including vapor pens, tinctures, CBD pills/capsules, oral pouches and edibles. Yesway entered the category that same year with CBD-infused water and has steadily expanded its offerings.

In March, Yesway announced plans for an in-store CBD concept called Feel Good Shop+ under an agreement with Las Vegas distributor GPO Plus Inc. and its Distro+ division. Feel Good+ offers drinks, snacks and vaping products sold on consignment.

Adato said business has been robust, with "broad selections" in most stores. 

"Stores have seen significant sales increases, especially for disposable vape products with Delta 8, HHC and hybrids," he reported. "Other popular items are beverages infused with CBD and Delta 9. The category drives traffic as customers see the benefit of a quick, convenient outlet for purchasing CBD products." Yesway also offers CBD gummies, pre-rolls and smokes.

The category is constantly changing, Adato pointed out. "It has evolved significantly. Customers are gravitating to new, innovative items with Delta 8 and Delta 9 that can be consumed in different ways," he said.

The CBD business could be even stronger if there wasn't a lack of U.S. Food and Drug Administration (FDA) standards impeding growth and consumer acceptance. "Should the category become more regulated, consumers will become more aware and educated about CBD, which will provide more opportunities for suppliers and retailers," Adato added.

Sans standards, quality and safety can be inconsistent, further deterring large retailers. "There can be wide variance of formulations from what it says on labels," said Brightfield Group's Zehner. "Some brands don't have the highest testing standards. It can be pretty drastic. This hurts manufacturers working to make quality products."

While the FDA has not provided clear guidance regarding CBD as a food additive, it has issued warnings to companies whose products made specific wellness claims. Consequently, "companies are being much more careful," said BDSA's Mitchel-Chesebro.

These types of issues have caused the number of brands in the category to fall from 4,000 several years ago to about 2,000 today, according to Jared Stanley, cofounder/chief operating officer of CBD oil supplier Charlotte's Web, headquartered in Chicago.

"Consumers pulled away because they might have bought products that weren't up to the same standards as others. The category has been declining for two years," he said.

In March 2023, two federal bills were proposed that could create uniform product guidelines.

The CBD Product Safety and Standardization Act of 2023 (H.R. 1628) would authorize regulation of interstate commerce with respect to food and beverages containing cannabidiol derived from hemp and for other purposes.

The Hemp and Hemp-Derived CBD Consumer Protection and Market Stabilization Act of 2023 (H.R. 1629) would make hemp, cannabidiol derived from hemp and any other ingredients derived from hemp lawful for use under the Federal Food, Drug and Cosmetic Act as a dietary ingredient in dietary supplements.