A Proper Look At … DTC — The Argument For Distributed DTC

To say that the legal cannabis market is in a state of disarray would be a monumental understatement.

In markets where the largest number of brands has proliferated — California in particular — the entire ecosystem is hurting: from growers suffering from lower prices on biomass, to retailers locked into high rents and employee benefits, to brands trying to sell into retailers who have no capital to invest in new and increasingly undifferentiated products. All of this against a backdrop of ever-increasing regulation, federal and state tax regimes that makes it almost impossible to succeed, and a thriving illicit market (selective legislative enforcement at its worst).

It is a negative feedback loop that destroys capital and businesses.

Brands have fought the distribution battle in cannabis for years, trying to crack the shelves of retailers — and what they are finding is that while many are good at product and packaging, few are also great at distribution and marketing. Distribution companies were supposed to fill this gap, acting as sales agents as well as distributors, but that model has broken down, and it has become clear that charging a fixed % of suggested retail price for distribution and another % for marketing leaves brands no profit whatsoever. Which is why many of the best brands self distribute — but even that is not a panacea for the woes being visited upon the industry.

Worse still, brands are being asked to pay slotting fees for shelf space in addition to having a team for “marketing support” — which usually means teaching budtenders about their products or showing up at dispensaries and essentially giving away product (or cash — or both).

While you and I might see a brand like Coca Cola and think of the ubiquity of their distribution, think of how many cannabis brands you can name that seem somewhat ubiquitous. I’d say Kiva, Wyld, 1906, Cookies and Stiiizy might fit the mold — but it is a short list. I would argue that Select was ultimately able to sell because of their great distribution and subsequent sales velocity. But it is a game that few have mastered, and represents an old-school, capital-intensive method for success that is more familiar in food, beverage, and other everyday consumable products.

More and more, brands have turned to a modern form of distribution — Direct To Consumer — DTC or D2C.

Like Bonobos or Warby Parker, these brands attempt to connect directly with their fans. They drive traffic to their own website, and cut deals with local distribution partners to get the products in the hands of consumers. In theory, this makes great sense. The brands get valuable data on their biggest fans, and are able to market directly to them — announcing new products, spurring repurchases, couponing, etc…

The distribution partners (usually non-storefront delivery companies like Grassdoor, Ginger Commerce or Amuse) also win, getting a steady stream of orders as well as the marketing information of cannabis users they can further market to (the data-sharing deals can be complicated, so this is not always the case).

Seems like a win all around.

But that hasn’t exactly been the case.

Turns out that by having a single point of failure — the distribution partner — brands are putting all of their eggs in one basket — leaving themselves vulnerable if and when (and it is increasingly when) a distributor has financial difficulties. 30 day terms turn into 60 days…into 120 days, and the working capital necessary to further market and manufacture dries up.

As it turns out, delivering weed in 20 minutes to the needy consumer is a difficult and costly business, and the cost of customer acquisition (coupled with taxation) has left most, if not all delivery companies, deeply in the red. In fact, almost every on-demand delivery company in the world has failed to produce profits despite tens of billions of dollars invested. So while all of these DTC deals start with great intentions and futuristic tech systems, they inevitably devolve into an unworkable situation for the brands.

At Proper, we offer a solution to these problems: Proper Connect.

Proper Connect is a brand-focused suite of services aimed at allowing brand sites to become shoppable storefronts, and a data repository allowing brands to manage their distribution platform on the back end. We firmly believe in the self-healing nature of distributed networks, and Connect feeds orders into Proper Direct, our distributed network of retailers willing to fulfill a consumer order.

The Proper solution for brands is DDTC — Distributed Direct To Consumer. More FTD, less Amazon. More Kayak, less Southwest.

Let’s take Kiva as an example. One of the largest brands in cannabis and self distributed in California, Kiva has all the advantages that smaller brands do not. They have wide distribution, they have professionals manning every aspect of their business, they have been well capitalized to date, and they have a great suite of products differentiated by first mover status.

And yet they have major issues.

Since cannabis is, by the nature of its regulations, a local business, let’s look at the alternatives for a shopper on the West Side of Los Angeles, California. Kiva runs a DTC business in CA with Grassdoor as its DTC fulfillment partner. A visit to their site (www.shop.kivaconfections.com) for Camino Pineapple Habanero Gummies will currently yield a sold-out state. Kiva’s own DTC store is out of stock. But if they weren’t, this product would be sold for $18 with a minimum order size for free shipping. Out of stock and at a higher price than elsewhere available is not the best experience for the consumer.

And it goes further — today it looks like almost every product in the Kiva lineup is out of stock on their own website. Every click to their website currently yields disappointment.

Now, let’s look at the same product(s) on Proper.

The search for Pineapple Habanero Gummies yields 74 stores in the trade area with the product in stock — ranging from $13 at Amuse on upward. As the founder and CEO of Proper, I am clearly biased toward our own product, but stocked out versus a choice of 74 retailers with stock in the product I want is no choice at all.

A look at the Petra Mints line yields similar results — in stock with lots of purchase options on Proper, versus nothing on Kiva’s own site.

Clearly this is a business problem for both Kiva and Grassdoor — but for Kiva, its biggest problem is in disappointing its consumers. A Google search for any of its products will inevitably lead to its own site as the first search result — so they are getting the bulk of the traffic — getting, and disappointing, the bulk of the traffic.

Brands need to have some control over their distribution, and Proper gives them that control by allowing them to promote one retailer over another. But the beauty of our system lies in the fact that a stockout at Grassdoor should not be a fail for the consumer.

Grassdoor might be the preferred distribution platform for Kiva, but it certainly should not be the only distribution partner as this example search so painfully shows. Consumers can get the product cheaper elsewhere, and perhaps more conveniently (although Grassdoor is a great delivery company — so is Amuse).

Ultimately, we see a world where distributed networks of local agents are the fulfillment arms for brands. The problem has been keeping track of the data. Who has the product daily? What is the pricing? Is it on sale? Can I have it delivered or do I have to pick it up? Is the dispensary open? Is there a minimum order quantity? How does a brand keep track of the myriad ways that a dispensary might enter this simple product into its system?

Proper answers all of these questions.

By adopting a distributed architecture for DTC, everyone in the chain wins. The consumer gets more pricing and delivery options, and a far greater chance of having the product in stock. The brand gets guaranteed sales as well as consumer data. The retail network is no longer fighting against the brand, as the brand was once picking winners (in Kiva’s case — Grassdoor over all other retail sales channels), but is now aligned.

Everyone has the same consumer data and can market to the consumer. There are no single points of failure that are out of the brand’s control (this is not exactly true — as Proper becomes a point of failure — like any other tech or data provider — but I would argue that as a tech platform we are the least likely to fail in the chain). Everyone wins.

This example has used a single brand and a single state (or location in a state) to make a specific point. But as brands grow and reach multiple states, these issues become more and more pressing. Kiva is now in 6 or 7 states, so is 1906 and Wyld. How are these brands going to deal with multiple distribution points in multiple states — when each has its own idiosyncratic rules and regs? Individual state websites? I hope not!

We would argue that having one brand website with the ability to hook up every distribution point (not just the ones in a walled garden network — yeah that’s you Jane and Dutchie) makes the most sense. That way, brands can do what brands are supposed to do — provide a consistent experience to every consumer in every market — leaving the fulfillment to those on the ground in each locality.

At Proper we have about 100 brands using our Connect system, and we are starting to roll out our Direct connections to dispensaries around the country. If you’ve read this far, and the story resonates with you, drop us an e-mail at sales@aproperhigh.com and we will be happy to get back to you right away. Or better yet, visit us at www.services.aproperhigh.com.If you are a brand, we can help facilitate e-commerce immediately. If you are a dispensary, we want to send you orders (and yes we want you to pay us for them — but in a very cost effective manner). And if you are a consumer — give us a try at www.aproperhigh.com. Our mission is to connect consumers to dispensaries through branded products.