A Generational Branding Opportunity

Building a brand is akin the Warren Buffet quote ” It takes 20 years to build a reputation and five minutes to destroy it”. Branding is the power to illicit emotional ties between consumers and products, especially when it’s difficult to differentiate between products and their respective quality. This exact issue occurred during the Civil War as solider’s health was at risk if they ate contaminated food, they needed a food supply they could trust. William Underwood Company was able to pioneer canned meats giving the armies a powerful new tool to vastly improve the conditions of war.[1] The cans were adorned with an iconic red devil, resulting in a textbook example of successful branding, a brand robust enough to currently be the oldest registered food trademark in the United States. [2]

Successful branding within a category of goods leads to a few companies occupying the majority of marketshare as they become the status quo and the most trusted, reliable, and desired brand. When you think of soda Coke and Pepsi come to mind. Want something to eat? McDonald’s, Burger King, Subway, and Dunkin’ Donuts come to mind. Sure there are alternatives but most people know these brands and associate them with quality and a predictable product.

Unlike other food products that give us nourishment and taste good there are food items we buy solely for their utility. Protein powders and health supplements are items of pure utility and it’s tough for consumers to even gauge if they’re working. Somewhere between these two extremes are energy drinks- they may taste good but they’re only bought with the intention of delivering an immediate and noticeable effect upon it’s consumption. The formula for creating an energy drink is pretty simple with a great overlap of ingredients between the top three brands; Red Bull, Monster, and Rockstar. These brands essentially compete to sell their own mix of caffeine, sugar, vitamin B12, vitamin B6, and varying other additives. Since these drinks are almost perfect substitutes for each other it’s difficult for consumers to objectively decide which product would deliver them the most utility (energy). These brands aggressively market themselves by sponsoring extreme sporting events to help consumers connect the dots between their energy needs and their energy solutions.

MNST is up over 60,000% since it’s IPO

The generational branding opportunity at hand is within the CBD space. What is CBD? What uses does CBD have? Do you use CBD? Will it show up in a drug test? Does it work? Where should I buy CBD? What dosage do I need? Is it safe? The news, your social media feeds, your co workers, and your local gas station attendant are all talking about CBD. CBD oil, CBD gummies, CBD infused food, CBD infused beauty products, and even CBD for your pets. It seems there’s nothing this magical elixir can’t treat or be infused into. It all sounds too good to be true and despite it all your interest is definitely piqued. Putting an unknown foreign substance into your body is nerve racking and consumers need and want guidance. This guidance will come in the form of a reputable brand.

Unlike energy drinks which differentiate in subtle ways CBD is a one ingredient product, emphasizing the influence branding will have. The current CBD market is dominated by sales pitches revolving how the CBD is sourced and created. This backstory is step one for any company hoping to build a reputable brand. Just like energy drinks aim to be synonymous with focus and adrenaline packed activities, CBD companies will need to be synonymous with integrity, effectiveness, and quality driven processes.

The soon to be leaders in CBD sales will source their CBD from cannabis rather than hemp, which will likely increase their COGS.[3] These companies will have a heavy focus on in-bound marketing and customer service. CBD has proven to be a polarizing topic, so polarizing that your customers will certainly discus your product with others, whether it’s good or bad. This word of mouth will make or your break a brand. If CAC is the new rent then creating a reputable brand is an essential objective and cost expense once you realize the potential CLTV. If someone has a great experience with your product and believes they’re doing something great for their health then what incentive will they have to experiment with competitors. This is a space where someone could have ‘their brand’ and stick to it with routine purchases for years on end.

How is CBD analogous with energy drinks? Both CBD and energy drinks are relatively new categories that grew immensely thanks to their perceived dramatic effect upon users. Both categories feature products that are cost effective for experimentation. Both are potentially habit forming. Both are glamorized by particular segments of media and culture. Both represent an opportunity to leverage iconic branding to sell high margin products.

That’s where the comparisons end as the TAM of CBD is significantly greater than energy drinks…. even though we are due to see CBD infused energy drinks. CBD is more than a just recreational product, it’s viewed as a health product and to a lot of people it’s viewed as medicine. This is a segment of consumers who are particularly vulnerable to any pricing power CBD distributors may have, especially when there’s a consensus ‘best’ brand of CBD on the market.

From an investing standpoint MNST is a miracle stock, will the development of the CBD market be able to provide a ticker that delivers it’s own outsized returns?

Right now it’s difficult to rank who the leader’s in CBD sales are since it’s a category that is still being defined, regulated, and adopted by users. I would speculate the winners in the space will be those already involved in the growing and distribution of cannabis and I would be wary of companies trying to leverage their hemp growing operations. Just like any other service or good, I would keep my eye on on Amazon as the CEO of Whole Foods has already proclaimed that the stores will likely sell cannabis and cannabis related products at some point. [4]Some CBD manufacturers may create a superior product but will lack the scale necessary to create a recognizable brand. At the end of the day, will the CBD space more closely resemble the IPA beer market where small time brewers can thrive on a fragmented basis or will consumption become consolidated towards a ‘bud light’ of CBD?

[1] https://blog.genealogybank.com/everything-you-ever-wanted-to-know-about-deviled-ham-but-were-afraid-to-ask.html
[2] https://culinarylore.com/food-history:oldest-food-trademark-in-united-states/
[3] https://www.projectcbd.org/how-to/10-tips-for-buying-cbd
[4] https://www.marijuanamoment.net/chances-are-good-that-whole-foods-will-sell-marijuana-products-ceo-says/