Creating cannabis white label products is a relatively cheap and fast way to prove your concept and get to market ahead.
In this episode, Jim will discuss:
- White Label vs. Private Label
- Red Tape You Need to Address
- Pros and Cons of White Labeling
- Which White Label Products to Start With
- Capital Needs
- Considerations for Choosing a White Label Partner
If you would like to join the GreenGrowth CPAs White Label Program and get started in the cannabis industry, then please visit us at: https://greengrowthcpas.com/get-started or call 800-674-9050.
Hey, everyone. My name is Jim Breese from GreenGrowth CPAs and thank you one more time for joining us. For today’s webinar we’re going to discuss White Labeling, which I believe is the future of cannabis, at least the next wave of cannabis. It’s getting a lot more attention, a lot more people are trying to get into the business and this is one of the ways where you can really make a name for yourself without having to spend too much cash. So again, my name is Jim Breese. I’m the Chief Marketing Officer here at GreenGrowth CPAs.
So just a little bit about us, GreenGrowth CPAs is a cannabis only firm. We have no other clients in no other industries. We focus solely on the compliance and finance sides of the cannabis industry. We prepared over 1,200 annual tax returns for cannabis operators in all different verticals from the dispensary’s, distribution, cultivation, manufacturing, delivery, testing–every different part of the supply chain in cannabis. We help operators in every aspect of that. We also have over 400 cannabis business clients, again, in all the different types of verticals and operating in 12 different states in the United States, as well as, international clients as well that are trying to break into the U.S. Market. Outside of just doing tax returns, we’ve done audit-related projects–15 of those in the past year and a half, so where we help people with their mergers and acquisitions, due diligence, the valuation of the companies and audits, keeping them compliant in their audits, in their taxes, in their books. We have a deep and thorough understanding of tax compliance and assurance related requirements for the cannabis industry, but again, we’re bigger than just tax. We’re not just accountants. We’re a full service firm that can help you pretty much in any aspect of the cannabis industry and if we can’t do it, we can connect you with a partner who can surely help you out and make sure that you become a successful cannabis entrepreneur.
Before we hop in, I need to let you know that the information contained in this webinar presentation is meant for guidance purposes only and not as professional legal or tax advice. And further, it does not give any personalized legal, tax, investment or any business advice in general. So with that out of the way, let’s hop right into today’s agenda.
So a few things we’re going to cover today, I want us first talk about what’s the difference between White Labeling and Private Labeling. And then I want to talk about why I believe that White Labeling is the next wave of the cannabis industry. We’ll address some red tape around the industry, specifically in the state of California. We’ll discuss some pros and cons of White Labeling as well as which products can be White Labeled and what product you should start with. Then we’ll discuss the capital needs and how much money you need to get started as well as any final considerations to wrap this up and let you get a little bit more color and context of the White Labeling industry in what you’re actually signing up for once you start to work with a White Labeler.
So first White Label versus Private Labels. So while White Label and private labeling are very similar, there are some subtle differences to distinguish the two. So with White Labeling, a generic product is created by a manufacturer for multiple resellers. So for example, a White Label manufacturer would sell a vaporizer pen to 10 different partners, and each is now responsible to rebrand that product as their own and they are able to do that. With a White Label business, each retailer, each business partner is selling the same vaporizer pen with no modifications at all. The vapes are simply rebranded and marketed as the retailer’s own product, and this is the fastest way to get to market, but your product will be the same as every other business or every other retailer out there. So without much differentiation in your product or not any things to really set it apart, you’ll need to work really hard to differentiate your brand.
Now with private labeling, which is primarily what we’re going to be talking about and discussing about, these terms can sometimes be used interchangeably. It depends on the capabilities of your vendor, but we’ll get to that in a moment here. But with private labeling, the product is created exclusively for sale by a single reseller, by a single person, a single brand. And let’s just keep going along with that vaporizer example. So the private label partner would then have the option to modify the actual product. So if you are a brand or a business and you want to get into this private labeling, with private labeling you have the ability to modify it to fit your selling requirements for your brand. A lot more levers to pull, The modified vaporizer that we’re talking about here is exclusive to your particular business and it comes complete with your logo, and your name, and your brand identity. And White Labeling has the ability to do that as well, but most times in private labeling you can go a little bit deeper with the packaging or where the raw ingredients come from or what material is used for the outside shell or whatever it’s going to be. Maybe you want to use shea butter instead of argon oil or whatever that’s going to be because you have a specific thing that you want to use. And again, sometimes these terms are used interchangeably and it really, really depends on the vendor that you’re working with and their capabilities of how custom that they can be. And for the sake of this presentation, I’m just going to use the word White Labeling, but again, you can get as custom as your vendor allows. So in cannabis you can get a totally off the shelf kind of product with little input and White Labeling. You just send them over a PNG of your logo, and bam, now you’ve got a vaporizer product. But if you want to take it to that next level, you can also go to a private label or someone who is maybe a more sophisticated white labeler and you can provide the raw materials, the packaging, the inserts, and any other things that help you make it more your own or your brand.
So next I want to jump into why I believe White Labeling is the next wave of the cannabis industry. So two things I want to address upfront. Getting started in the cannabis industry is typically very costly due to the licensing, capital expenditures, how much working capital you need and so many more things that add on top of that. It’s like a seven layer cake. There’s just so much going on that you need to pay for. And that’s because it’s a highly regulated industry. This is no different than opening up a pharmacy or starting a liquor brand. There’s a lot of red tape that you need to address. You need to have a team of professionals to help you address, so it’s going to cost a lot of money. And the second thing I want to address upfront is that cannabis is kind of cliquey. It’s all about the relationships. It’s the beginning, it’s a new industry that’s emerging out of its darkness period. And so there’s a lot of relationships and around friendships in there where some of these bigger brands have been friends and been homies for , 7, 8, 15 years. And they really want to keep this knowledge intimate to themselves. So knowing this, I want to make two main points of why I think White Labeling is the next wave that can usher in the next, we’ll call it “class” or “next set” of entrepreneurs and business owners.
So the two main points I want to bring up is that White Labeling helps you to reduce your initial startup costs by allowing you to rapid test your ideas before jumping all the way into the deep end of the pool. So instead of having to come up with $1 million, and permits, and all the other things that come along with building your own manufacturing facility, you can reduce your risk by getting a proof of concept to show some investors that you have a solid idea or product market fit before you go and get fully funded and bring manufacturing in-house or before expanding your products to a whole new line, a whole new part of that cannabis industry.
Now to address that relationship part and how cliquey things can be. White Labeling allows you to leverage built in distribution in retail relationships. So the power of manufacturing is in a few hands. There’s a lot of little mini manufacturers, but those that can do large white labeling runs for you, it’s in the hands of a few people and they have all the economies of scale. And over the next 12 to 24 months, that’s going to become more impactful because if they’re not already there, they will get there at some point. And they’re typically vertically integrated and have relationships with distributors if they aren’t one themselves. And those distributors have relationships with dispensaries and delivery services. Your hardest task of getting into a dispensary or getting the ability to get into a delivery service and building those relationships throughout the supply chain, is typically already done just by engaging with the White Label manufacturer. Now, I’m not going to say that this is the end-all-be-all and you’re going to be all set. Some people are just great at manufacturing and they are terrible at building these relationships just because they have a manufacturing background. Maybe they came from a different industry. We’re able to set up a facility fast, but just don’t have those relationships. And so we’ll talk about some of the due diligence things and considerations later in this presentation here so that you can understand really what you’re getting into and who you’re working with and what they can provide you. There’s going to be a just general manufacturer white labeler, but one who’s really smart, connected, intertwined into the industry who can really help your brand take off and get some of those eyeballs on your brand, because it’s very noisy nowadays in the cannabis industry. There’s a lot of new brands. It’s really cool to be a cannabis entrepreneur, but it’s really tough to break through all that noise.
So now let’s address some red tape about White Labeling. So you have CBD or THC. Now CBD is not Schedule One, so it’s a little more relaxed. You can probably find more white labelers to help you out. You can even do drop shipping with some of these white labelers where they’ll keep some product on hand at their warehouse. You can set up a Shopify that sends over an API call to their packing facility or their warehouse and it ships out without you even having to touch or see the product. Now that’s, again, typically with CBD. Now with THC, in California specifically, there’s a little more red tape and some hoops you have to jump through. The state has acknowledged that White Labeling is going to be inevitable. Not everybody has $1 million to start a business and initially White Labeling wasn’t even allowed, but now it actually is. So essentially what you need to do is create an intellectual property licensing agreement with your White Label vendor. So for example, say you and your friend, or you and your team, or you are on your own, you build up a brand, you want to start a brand, you want to sell creams or topicals infused with THC for pain relief. Maybe you want to go after runners because you’re a runner and you know that if we build a brand that’s geared towards runners, we can actually move this product because we have name stay in this local area of runners. So, what you do is you’re going to develop a logo, packaging design, if it’s a really good one, get a design patent for your packaging. If it’s very unique or cool and you put that intellectual property into an LLC so that the LLC owns that intellectual property. And next, what you need to do is find a white label producer or operator who wants to sell your products. You’ve got to get them excited about your brand and don’t be afraid to share your ideas. They’re just ideas and execution are where the real value is at. You have to sell this idea to the white labeler because a lot of people want to get into White Labeling as well. Some of the manufacturers that we’re working with and trying to vet for a program we’re starting up here, they are so backlogged in the amount of people that want to work with them that they can’t service everyone. So they’re only servicing the biggest, most sophisticated brands that want to get into the industry or people that have really good and unique ideas in brands.
So again, be able to share your ideas and sell your ideas to your White Label manufacturer and get them excited about it. So once you find that person that you’re going to be working with, if they produce that product, then you as the IP holder get a royalty payment from the White Label producer. Okay, so there’s a few ways in which that can happen. It could be on the per unit basis, it could be based on total revenue, it could have minimum payments every month, which incentivizes the White Labeler to push your product out to those distribution networks. There’s a lot of different variables in these agreements, but essentially you’re going to be getting money on the brand that you created and truly products are going to get so good and so easy to manufacturer. That brand is all that you’re going to really have left to lean on. T-shirts are t-shirts, some people pay $80 for a white t-shirt. Some people pay the $6 for a Hanes t-shirt. It’s all about the brand and where you fit in and who your target market is. Even in food, most of the major sauces and salad dressings and other food products are made just by a few co-packers like Ventura Foods, but brand is what moves those units. So again, the same thing is happening in cannabis. Just make sure that you’re building a brand that people have affinity for that resonates with them, that addresses who they are as individuals as well as a collective group, so you can really pull people into that story that you’re creating with your brand.
Now lastly once that IP agreement is made, the state then requires the producer or the White Labeler to notify the BCC, which is the Bureau of Cannabis Control that there’s a new financial interest holder in the license. Now it’s not that they’re a new owner or an equity holder in the license, it’s simply that you need to let the state know that the brand is benefiting from the sale of cannabis products under that license so that the state can see, “Hey, is this person the new person they’re adding on a bad actor or not?” And lastly, this is just a high-level 30,000 foot look at everything here, but do your due diligence in your specific city, county and state. I said this is just for the state of California, and again, just some general guidelines on it. So our suggestion is to work with a lawyer to make sure you know how to structure these deals properly to protect you and the producer as well as keeping yourself compliant in many of these White Labelers have in house counsel to help you negotiate these deals. Or maybe they have a boilerplate deal. There’s not much wiggle room for negotiation, but usually compliance is built into the system.
So let’s just jump into some pros and cons of White Labeling. Now, it’s not all roses, it’s not all great. There’s not all of these benefits and no drawbacks. So let’s just peel back the layers of the onion and really just give you a good healthy dose of reality. So the pros of being in the White Labeling sector of the cannabis industry is that multi-state operators can open into new markets quickly and increase their distribution drastically. So if you have a formula and a product that works over in Oklahoma and you want to come over to California, you can’t bring THC across state lines. So to open up in California, you need to find a White Label manufacturer who will work on your formula, will work on your product, and bring you into that market. So it’s how you can take a proof of concept from one state to another state, open up fast and leverage all that brand power you have in another state and say, “Hey look, we’re moving 1,700 units a week in this other state. Can you please help us open up in Southern California and then in Northern California,” or wherever you’re trying to go to, you could end up opening up in Illinois or in Nevada. It all depends on how fast you want to expand, but White Labeling allows you to do that quicker. And White Labeling is usually the fastest implementation of getting into the industry and relatively cheaper than an all in house manufacturing type of business. Again, you don’t need $1 million to start. I hit on this a little bit earlier, but compliance is typically built into the model of White Labeling. No White Label manufacturer is going to purposely skirt the law just to make $50,000. They’re going to keep themselves protected, which will then keep you protected. Another pro about this is that it reduces what you have to focus on. So when you go to White Label manufacturing, you get to focus solely on brand and visibility depending on how much distribution is built into your model. But when you focus on that, again, the future is all about the brand and great operations. So if you have great operations that comes from the synergy between you and your White Labeling partner and their capabilities paired with your capabilities. So if you want to focus on just building a brand, building visibility for your brand, find a White Label manufacturer that has the ability to distribute your products to the most end consumers or to the most retailers. Another positive thing about White Labeling is that you typically know your costs upfront so you can price your products accordingly, If what your costs are, you can bake in your margins and know how much you need to move to break even or to make a profit. And then also if you want to open up and become a big, big shop that has lots of offerings, having multiple White Label vendors allows you to offer a wide variety of products for which you wouldn’t really have the in house capabilities to do. It would take a lot of machines to be able to open up a topical manufacturing and then vaporizers and then bottled flower and all these other things that come along with the ability to White Label. If you wanted to do that all on your own, you need a really large facility as well as a lot of money and a lot of equipment and a lot of human capital and human intelligence. And lastly, I think I hit on this and just hit it again. It’s the fastest go-to-market strategy if you want to get into the market, this is the fastest way to do it.
All right, so let’s discuss some drawbacks of White Labeling. Again, it’s not all positive. There are some limitations to this. So when you start to work with a group of people or a team of people or a few different parties, things can be lost in translation and there can be misunderstandings in what you want for your products. So when you pass on your vision or your product ideas to say another agency, then they pass it on to a project manager at a White Label company who then passes it onto a project team with inside that White Labeling company, this stream of information can get distorted at some point. An important part of your vision or the functionality of the product that you want or an ingredient it may get lost along the way. And that same thing happens and it repeats in a feedback loop, because it’s not just going to happen in one iteration. A few things can fall off at every step. And then the wheels fall off if you don’t keep close eye on your White Labeler and that relationship that you have. So the chance that your project’s agenda will be changed or miscommunicated is a probable risk when you get into White Labeling. So double check everything, get samples before you give final approval for that scale up manufacturing. Really, really develop a human relationship and good communication with your White Labeler. As we discussed in the beginning between the difference between White Label and Private Label, there is potentially a limited ability to customize your end products. So maybe you want to offer some type of minute feature or some updated creative packaging idea. This may not be possible depending on the White Label manufacturer or the flow of the products. You could have someone manufacture it in bulk, like the main pieces, and then you do all the final assembly so you can make sure that there’s a handwritten note in each one or whatever you want to do. But again, this bleeds a little bit more into that private labeling, which will then probably increase your costs. So just be thoughtful about what is really an important no negotiation; this customization needs to be built into the product, and if not, we’re not going to go with this White Labeler or this Private Labeler. So just keep that in mind as you go throughout the process and spec out your products of what you really want to have. And building on that limited customization is that duplicate products will be in the market. If you go with that straight White Labeling, send a PNG of your logo, they print you out the packaging, the product and all this stuff and it’s very much the same as the next Company A and Company B, then you’re going to have to work really, really hard to differentiate your product since many companies are going to have the same functionality, the same feel to their product. You see this a lot in the vaporizer industry with the batteries all looking pretty much the same or a lot of the cartridges look the same. So just be very cognizant of what’s important to you. What are you trying to actually accomplish? Are you trying to accomplish a proof of concept for a brand name? Are you trying to accomplish moving 10,000 units? Are you trying to accomplish just getting something started, really truing up your end goal with the person who’s going to help you get there and see if they have the capabilities to get you to where you want to be at.
So now as we discussed the pros, the cons and what this really is and how to do it, which products can actually be white labeled? Again, we touched on this before, you can do CBD and THC variants or a blend of the two. You can do topicals with salves and creams and bombs. You can do oils, tinctures and things like that. Sprays, cosmetics. You can do soaps, vaporizers, the vaporizer cartridges and the batteries. You can do bottled flower. Someone could grow great cannabis and they just slap your name on it like you grew it for yourself. You can do capsules like pills, you can do dog treats, edibles, anything. If you can put oil into it, you can probably make that into a product. There’s so many different ideas, It wasn’t even thought, maybe five years ago to do CBD dog treats and now it’s one of the more popular products. You probably could figure out some gum ideas or beverages. There’s so many different ideas, but look into what your local laws allow you to do, Some states don’t allow you to infuse THC with alcohol products or that your edibles can’t look like animals. So there’s a lot of different little nuances and red tape that you have to work with and work around. So again, work with a lawyer or someone experienced in the industry that can help you get the product that you want and stay compliant.
So with all those different product ideas, what products should you start with? While there are many factors and it’s really up to you, but let’s review some considerations when you walk through this thought process of what product you want to start with. So first and foremost, I always think about what’s your risk tolerance? Do you want to go with a proven product? You see vaporizer cartridges moving, so you go with that because it’s more of a sure bet compared to something that’s groundbreaking, you haven’t even thought about it. You’ve never ever seen it and you want to go and spend a lot of money in R&D and build this unique product. Or do you want to do something in between a hybrid of something? Kind of bring this one plus this one makes a new kind of product. It’s really up to you what your risk tolerance is. Because risk tolerance includes the amount of time in the amount of capital you need to put into this. So think about how much risk do you want to put into this business. Then you need to consider who is your intended target audience? So questions around that are like, what problem do they have and what do they desire? So if you’re working with maybe the female target audience and there’s all these vaporizer pens but they look real masculine, maybe you start one that’s got more gentle pastel colors, it’s smaller in size and that addresses, maybe, that it’s inconspicuous and can fit into a purse or can fit into, women have pants with really shallow pockets and they want it to fit in those shallow pockets. You have to ask yourself, can this product provide a solution to the problem that my intended target audience has. There’s a lot of different target audiences you could hit, I talked about earlier for the runners, maybe you are going to be addressing pain relief for runners. Does this topical product that you’re going to create actually work and relieve the pain in their shin splints or in their ankles or in their feet? I’m not sure what runner problems are, but I can just only assume that there’s probably something wrong with their legs. Does your product address that intended problem they have?
And the other thing kind, again tying into the risk tolerance is, how much capital do you actually have? Because some products are more capital intensive than others. If you’re going to be doing something groundbreaking, more costs are going to be there. But if you’re going to go with something more proven, not as much costs, it can be a little bit faster to go to market. So do you want to do something really big and get a huge initial orders so you can reduce your unit costs and then increase your margins later down the road, because you have the ability to get into more dispensary’s? Lots of considerations around capital there. Then you need to think about how are you going to be marketing the product in what influence do you have with that target audience? So maybe you have no pull at all in any specific industries. So maybe you’re going to start using influencers or maybe you do have some kind of pull in an industry or in a target demographic and you’re going to use your personal network. Or are you going to go real big and buy billboards in Downtown Los Angeles or in Hollywood and get a lot of people to know about your product at a very expensive cost. Because with cannabis specifically THC, you cannot buy paid advertising on the main networks like the Googles of the world, Facebook, Instagram, Twitter. You just can’t do that yet. They’re not risking the ability to buy those ads. So, but for CBD you can do that. So just be cognizant of where you’re actually going to be marketing at. Maybe you do event marketing in dispensary’s or you go to Facebook groups for people that are in your target demographic. Or you could do hand-to-hand combat by getting a kiosk at the mall during the holiday season and sell CBD products. It’s going to be a very, very popular product this year. I can already tell in feel that CBD is going to be one of those default Christmas gifts for maybe people that you have no idea what to buy, but you know they may have a quote-unquote physical ailment or something that these CBD companies are saying that, “Hey, if you get this product, it’s going to fix this issue or help you out with this problem that you have.” I can really see this becoming one of those successful kiosks at the mall during Q4 this year.
Another consideration for deciding which product to start with is what kind of distribution do you currently have? Do you have built in relationships or are you building new bridges? If you’re coming in real cold to this industry, think about maybe having a more differentiated product. It’s an easier sell into the dispensary. They already have access to vaporizer cartridges and bombs and pills and all these other things that are common products. By going and getting something more unique, you may have an easier sell getting into there. Or maybe you own a dispenser yourself and you already see what’s moving and again, you just want to recapture some of that margin. If you see that vapor cartridges are moving fast and it’s easy to sell or upsell one of those vaporizer cartridges or you do a deal on it and you know you’re paying $10 wholesale for it and you’re selling it for $45. Well why not just go to a White Label manufacturer and get it for $6 and then sell it for $30? It’s a little bit of a deal because maybe you’re in a budget shop and people don’t want to pay that $40. It’s all up to you. There’s so many different ideas. But just think about what kind of distribution do you have and how do you actually get into where you want to be to create more distribution or leverage what you already have.
And lastly, I kind of touched on this a little bit earlier, but like what expertise do you have? What is your expertise in? Maybe you’re a dog trainer, so you should start selling dog treats because people already trust you in that space. If you’re a dog walker, maybe you should get into selling dog treats because people already trust you around dogs. They think that you’re a quote unquote expert, maybe not as a dog walker, but as a dog trainer. But if you’ve built a relationship with 20 or 30 different clients that you walk their dogs, maybe you can sell them a bag of treats every two weeks and that adds an extra $10 or $15 in your pocket per client. And then you have so 30 clients at $15 that’s $450 a month. There you go. And then you can start to recruit other dog walkers to get into your business. That’s how you can find an opportunity. You don’t have to become the biggest, baddest cannabis company. You just had to find product market fit and leverage your built-in trust.
Now the big question we always get is, “Hey, how much capital do we need to get started in this business?” So what the generic, starting your own company in cannabis, it can be quite high. But with the White Labeling it can be a little bit different. But there’s a wide range depending on how big you want to go from the beginning. You could start small with a proof of concept and then scale up. Or if you know what you want to do and you jump in full force, you’re going to need a little bit more money, And it’s all up to you. But there’s a spectrum of how much capital you want to have. So I can’t give you a steadfast number, but I will give you some considerations on how to think about this. So typically I see a minimum of at least $50,000 to $75,000 and maybe even closer to the $100,000 mark. And yes, you can do it on a shoe string budget, but that’s if you do things perfect. And if you don’t, you could be sitting on a thousand vaporizer cartridges with no buyers. You got to think about the total cost of doing business, not just going to the White Label manufacturer. Don’t just try to go in and get done fast. You need to have good amount of capital to get started in this industry. But again, if it’s lower, maybe you are again, that dispensary you already have built in everything else I’m going to discuss in the next few bullet points here. So you know you only need $15,000 to do your first product run because you want a thousand cartridges at $15 a piece for one gram cartridges and you’re ready to roll because you’ve got the built in distribution, you’ve got the built in marketing, you have a captured customer client base. So I’m talking more about brand new, never been in the industry. You’re going to need at least $50,000 to a $100,000 but more in that top end, especially if you don’t have experience. The biggest factors truly in my mind depend on the minimum order demands from your manufacturer and your ability to distribute your product out. Again, I brought up dispensaries can be a little bit on that cheaper side, but if you’re brand new, you’re going to need a good amount of money to move into this industry. And again, it also depends on how well you can actually execute. Do you have any business experience, just general business experience? But how about cannabis business experience and marketing experience? Do you know how to create a brand? How to drum up some excitement for this brand? How to move units of a product? So what’s your go-to-market strategy, you’re going to start slower? Or do you have the ability to move very, very fast?
So when we talk about this big number, $75,000, $100,000 or $50,000 again, consider the full cost of doing business. So product samples, design of the packaging. If you don’t do design yourself, paying someone to design your logo, the packaging design, testing out the products, you’re going to go work with 4, 7, 10 different vendors. You need to buy samples, test out those products over whatever time it takes for you to create some certainty in your mind. So it’s going to cost money and that could cost $1,000, $2,000. It’s just totally up to you and how deep you want to do your research. Then you need to look at your initial product run. What’s the scope of that? How much product you actually need to produce for the minimum order quantity? Storage costs–so if you’re going to work with the pure White Labeler that does drop shipping for your CBD, maybe they charge you every month to store your product. But if you’re going to bring it in house, you’re going to have to find some way to store that. You can’t store it at your house. You can’t run a THC company out of your house. You need to find a licensed facility to store that at. Then you need to think about a marketing budget. How much are you going to be paying for any of your marketing tactics, website development, if you’re going to be building a website and not doing it yourself. Operating capital, taxes, SG&A, there’s all these expenses that come to starting a business. So really be thoughtful about when you approach this industry, and just this specific aspect of white labeling, it’s not just getting the product, it’s all the other costs that you have to incur to actually get this product in the end consumers’ hands, or even just to the retailer, so that the retailer can bring it to the end consumer.
We’ve covered a lot here. I just want to go over some last few considerations that you need to put these thoughts into your mind and really think about. Are we really going to be doing this and if we are, let’s be really thoughtful about this. So when you pick a White Labeling partner you to think about how close are they to you geographically. Do you have the ability to go in for an inspection of their facilities or if you want to keep a real tight handle on the manufacturing practices? And this also allows you to do faster product review and testing. But if you’re a multi-state operator, maybe you need to put some boots on the ground in California for the first four to six months while you get your foothold in the LA area or in the San Diego area or in the Sacramento area. Now the next thing to consider is what’s their reputation? Are there other products out there that they’ve created that they’ve helped take to market that they’ve helped manufacturer? Ask them these questions, say, “Hey, what other brands do you manufacturer for? What other brands have you helped explode their awareness?” Get to know your white labeler don’t be scared to ask these questions. Then looking into your white labeler, are they vertically integrated with distribution? In most cases they are and in most cases I would say try to work with the least amount of partners because for a few reasons, I think three main aspects of this. It helps you roll fees into one transaction. It caps your costs, you know what you’re going to be out-the-door pricing. Secondly, it helps you reduce your tax burden since most, if not all movements are under the same license, at the same address, which means less taxable events. And then it also saves time in negotiating and coordinating. If there’s only two people to work with instead of seven, you reduce all that back and forth with emails and phone calls and as we talked about earlier, that lost in translation the least amount of people that have the ability to drop the ball the better.
Next consider do they have contacts that want to take your products on? This is that distribution part. I keep hitting on this because it’s really, really important. Any white labeler can produce a great product. Like I said, in five years everyone’s going to making great products and any white labeler can distribute products because you just need a license to do that. But can they actually get you shelf space. Shelf space is the name of the game. When you see certain cereals in the grocery store or at eye level versus other brands that are at the floor or way at the top, there’s a reason. They pay for that and it’s also prevalent in cannabis. It’s called slotting fees, In cannabis, specifically in California, you can see fees anywhere from a $1,000 up to $5,000 per month to get shelf space in some dispensaries. Now, ethically this is frowned upon and some people say, “Hey, that’s not true market telling you what to do,” but it still happens. Look, they run the dispensaries, they are the first layer closest to the customer. They’re going to do whatever they have to make extra money and it just happens. So, sometimes you can even get into businesses unless you know someone at the dispensary. There are some dispensers that are sitting outside LAX and all the international clients come there because it’s so close. They’re sitting at the LAX hotels and they do $5, $6, $8 million in business. And it’s really hard to get into that dispensary. And you can only get in there if you know somebody. So my thoughts around this or my guidance would be, you need to think about creating a pull strategy, getting customers to ask for your products compared to pushing your products onto the retailers. Because if 7, 8, 10, 12 people every week for the past month have asked for ABC product and we don’t have it, it’s going to force that purchasing agent at the retailer to say, “All right, I need to go look at whatever this ABC product is. We’ve had 50 people ask us in the past month and I don’t want to lose business to the dispensary down the street.” So that’s a pull strategy versus a push strategy onto the retailers. And I would say really, truly never ever fully rely on your White Label partner to do the sales part. Even if they offer it at a higher sales point. They are really good at manufacturing and probably not the best at sales. They can probably open the door for you and say, “Hey Mike, I want you to meet Michelle. Michelle, meet Mike, and then you guys take it from there.” You really need to be a salesperson of your product, be that ambassador, enlist other brand ambassadors to talk about your product and bring your product to awareness within those retailers.
A few other considerations around, one really, really important, the thing that we think about the most is structuring a deal to understand your exposure. So some inexperienced brands will not fix the production fee, which can really, really get out of hand depending on the experience of the White Labeler. So for example, packaging, and you have a manufacturer that does everything from A to Z product and packages it and puts it all together. Well what if they don’t store your packaging properly and it gets damaged? There could be a clause in your contract, they’ve got to pay for it, but it’s still a headache that you have to deal with. But aside from it getting damaged, say you actually dig into the numbers. You want to look at what we call production variances. So an ideal product we’ll say is one package, one label, one product. But some things do go wrong, it will happen. So who assumes the responsibility when things go to two packages, one label in one product who’s paying for that additional package? So we suggest you be able to cap these variances or at least be able to moderate it with each production run. So getting a report back from the manufacturer, we made 500 products, we end up using 527 pieces of packaging, 500 products and 570 labels. This can give you some insights to, hey, maybe our packaging is not as efficient as we thought. We should maybe think about retooling our packaging or maybe our label should be done in a roll instead of individual labels. A lot of things to consider when you start to get these production variances back from your manufacturer. So to build on that, structuring your deal properly and the product variances is understand the White Label or inventory management so you can get reports. You need to know about your business, you need to know the numbers behind your business. So do they have a dashboard or a portal that tells you how many packaging units are on hand, how many labels are on hand, how many production runs have been done and when is the next one scheduled? What are the inventory quantities on hand? And what we’re seeing is because the industry is very new, there’s not a lot of sophisticated technology being implemented. There’s a lot of sophisticated technology, but it’s not always being implemented. And you’ll see that many of these White Label manufacturers will have to do a hard count by hand and it’s not the ability to look into a portal. So depending on how granular and how flexible you want to get with your inventory management, just take these things into consideration.
And the last part about structuring is raw materials. So when you structure this deal there’s going to be a clause in there that says, ‘raw materials need to come from white label manufacturer buh, buh, buh,” whatever that’s going to be. So when you look into that, understand, where can these raw materials come from? Is it the manufacturer only? Can you work with an outside vendor? If it is an outside vendor, does it need to be prevented by the White Label manufacturer? Is there an additional cost to using an outside vendor? I would really try to work in there the option to keep it open that you want to work with an outside vendor for your oils or for anything, any part of the production. At least keep that option open, open for negotiation. Don’t close that door because you don’t know in 18 months a new oil manufacturer or refiner may come up that is just the best product and that you hear it all over the streets, hey, if you’re not buying oil from this company, you’re really missing out. You’re making a subpar product. So that would be my thoughts around structuring your deal properly and some other considerations about White Label partners.
So we covered a lot of ground here, a lot of information, but I just wanted to give you a few key takeaways. So White Labeling is a relatively cheap and fast method to go to market. Improve your hypothesis, you can find a proof of concept, get some product market fit and then leverage those results to either go get funding and scale up your operation or if it doesn’t work, cut bait and just move on. No worries. A lot less money has been lost. I would suggest that you work with a reputable and experienced team who can help keep you compliant throughout the entire process. Whether that’s lawyers, tax professionals like GreenGrowth CPAs to make sure you’re not going to be exposing yourself to too many taxes, experienced manufacturing teams who can create a great product with a little variance and not opening you up to a lot of exposure of risk. The next part around this is building a brand is going to be paramount when working in the White Label part of the cannabis industry and creating White Label cannabis products. Again, if you go with a strict White Label and you don’t have any customization brand is all that you have, but if you work in private label and you go a little more custom, you have a few more product differentiators to lean into. But really brand is what this is going to all boil down to. You see it in all types of other industries. There’s lots of different ketchups and I would say 80% of them are made by one big manufacturer. It’s just the brands Heinz versus Hunts versus this new organic something or other. That’s where it’s going to be at. All about the brand. And lastly, structure your deal to reduce your exposure to unnecessary costs in limited future product updates. So make sure you’re addressing what the production variances are going to be and trying to cap that as well as giving yourself the space to have new vendors come in or new suppliers of raw materials come in to help you make a better product 18, 36, 48 months down the road.
So thank you for taking the time to watch and listen to the webinar. Hopefully this has brought you some value and given you some color and context around White Labeling in the cannabis industry and why we believe this is the next wave at least for the next 12, 24, 48 months. And if this is something you want to get started with and get into White Labeling today, we are creating a White Labeling program for our clients synergizing all the great things we have going on with our client base. So if you want to get started in White Labeling that product and that service, we’ll be opening up soon. So give us a call at (800) 674-9050 or visit our website at GreenGrowthCPAS.com and click that “Get Started” button on the top, letting us know that you want to get started in White Labeling. And when that service becomes available, we will let you know and help you get into that pilot program, help you get your cannabis business started faster, cheaper, skip all those licensing requirements and really get down to business. So again, thank you for taking the time. I really appreciate it. If you want to get in contact with us one more time, go to GreenGrowthCPAS.com or give us a call at (800) 674-9050. Have a great day and we’ll talk to you soon.
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