Business-to-business services like white labeling are becoming increasingly important in the cannabis industry.
Cannabis companies are increasingly turning to white label agreements to expand product offerings and gain market share in new segments of the cannabis industry.
Most of the investing hype around the cannabis industry has focused on business-to-consumer models, but some cannabis companies are finding significant opportunities leveraging their manufacturing infrastructure for business-to-business services. Value-added cannabis products like edibles, topicals and extracts are gaining market share in the global market. Cannabis producers want to deliver the most in-demand products, but it’s not always viable to build the infrastructure to produce them. As a result, cannabis companies providing white labeling and toll processing services could see increasing demand as others in the industry expand their product lines.
According to data by Grand View Research, the global legal cannabis market is projected to be worth US$66.3 billion by 2025. Within that market, value-added products like extracts are some of the fastest-growing categories. The global cannabis extract market was worth US$5.3 billion in 2018, and Grand View Research projects that it will grow at a compound annual growth rate of 22.1 percent up to 2025. This is leading more cannabis companies to focus on extracted cannabis products, either by building out their own extraction infrastructure or outsourcing to white label services.
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White label basics
White labeling is a common business practice that involves one company agreeing to manufacture and/or package a product that is then sold and marketed under another company’s brand. This is usually done in exchange for a flat fee or percentage of product sales depending on the terms of the agreement. Usually, companies look to white labeling services if they don’t have the necessary infrastructure to manufacture the product themselves or if it is not economical to do so. White labeling often goes hand-in-hand with toll processing, a practice in which one company provides the raw or partially processed product for another company to manufacture into a value-added product.
White labeling and toll processing are particularly common in the cannabis industry, with a number of cannabis companies that have built their models around business-to-business services. For example, in addition to offering business-to-business cannabis lab testing services, Adastra Labs Holdings is equipped to provide white label extraction services. Client cannabis producers can outsource their raw bud for extraction and processing tailored for each client’s needs. Adastra can turn raw bud into high THC or CBD distillate, bulk vaporizer formulations, capsule formulations and water-soluble formulations.
“Our customers recognize the need to respond quickly to changing market conditions,” said Andrew Hale, CEO of Adastra Labs. “By offering unique extract derived products, white labeling and toll processing, Adastra Labs will provide flexibility to cultivators and value-added cannabis product producers so they can focus on their core business operations. Further, white labeling and toll processing will help cultivators remain profitable by squeezing every drop of revenue out of their harvests by turning less desirable flower and trim material into high-value cannabis distillate products.”
Major cannabis producers are also using their extraction and manufacturing infrastructure for white labeling in order to create additional revenue streams. In October 2019, Valens GroWorks (TSXV:VGW, OTCQX:VGWCF) announced a multi-year white label agreement with cannabis accessory company BRNT to supply BRNT with cannabis extracts, filling services and national distribution of a line of custom-branded vape pens. Valens has also entered into a five-year deal with craft beverage company Iconic Brewing to provide extraction and formulation services for Iconic Brewing’s upcoming line of THC- and CBD-infused beverages. In the US, 1933 Industries (CSE:TGIF,OTCQX:TGIFF) provides white label services for several cannabis brands, including Denver Dab Co., OG DNA Genetics, The Real Kurupt’s Moon Rocks, Gotti’s Gold, Blonde, The Original Jack Herer and PLUGplay.
White labeling vs vertical integration
While much of the cannabis product sold today is still the raw product itself — the classic dried bud produced directly by growers — value-added consumer packaged goods are taking on an increasingly large role in the industry. These include products such as oil cartridges, extracts like shatter and budder, topicals like CBD bath bombs and lotions and edibles like infused candies and baked goods. Many cannabis brands want diversified product offerings to capitalize on the latest and greatest cannabis consumer trends; however, the processing labs and manufacturing facilities required to make these products are massive investments.
Vertical integration can be a highly efficient strategy for large cannabis companies with the up-front capital to build the necessary infrastructure, but companies without ample resources take a huge risk by investing in them, as operational costs can easily become out of control. In addition to the time and cost required to acquire the space, building, equipment and licenses, companies also have to train and pay specialized staff while paying ongoing maintenance costs. Outsourcing manufacturing to a white labeler or toll processor allows a cannabis company to expand its product offerings and establish its brand without the financial risk that comes with vertically integrating.
In an industry as new as the cannabis industry, companies have constant opportunities to try out new and innovative products. However, not every product catches on with consumers. White labeling allows companies to take a chance on new and experimental cannabis product categories with the option to make changes on the fly without drastically altering their operations.
White labeling is also an attractive option for retailers who are looking to build their brands through their product offerings. This type of white labeling has long been common in non-cannabis retail spaces with major retailers like Walmart (NYSE:WMT), PetSmart and Save-on-Foods selling white-label brands like Great Value, Great Choice and Western Family respectively. Likewise, cannabis retailers often have their own store-branded merchandise. Having store brands helps a retailer build consumer loyalty and repeat business by integrating the retail brand into the product experience. While some cannabis retail brands are part of larger vertically integrated networks that supply their own products, others are solely focused on the retail side of the industry. Many of these retail-only companies rely on white labeling for their in-store brands.
Business-to-business services like white labeling and toll processing allow cannabis companies to offer a wider range of cannabis products without having to come up with the means to manufacture those products on their own. This provides a valuable alternative to vertical integration while lowering the barriers to innovation. Through white labeling strategies, cannabis companies have the potential to create new revenue streams while limiting operational costs.
This article was originally published by the Investing News Network in 2019.
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