Cannabis branding and licensing: looking forward
How Cannabis Companies Can Monetize Their IP to Stand Out and Grow
By: Weston Anson, Evan Loker, and Pierce Urban of CONSOR IP Consulting and Valuation
As consumer discretionary income continues to rise, demand for various types of licensed products naturally follows. Subsequently, royalties from the licensing of consumer goods has continued to excel every year since 2013. Although there is significant growth in the traditional licensing categories, the expansion of marijuana legalization has sparked a boom in the licensing industry for a wide variety of branded marijuana products, including “flower,” vape pens, edibles, oils, creams, pharmaceutical products, and CBD. At the 2019 LIMA licensing show in Las Vegas, a dedicated section called the “Cannabis Brand Pavilion” was formed to accommodate such new cannabis companies – – adding to the existing licensing of major cannabis brands such as:
- Cheech and Chong – Chong’s Choice
- Willie Nelson – Willie’s Reserve
- Snoop Dogg – Leafs
at the LIMA Cannabis Brand Pavilion included:
- Legion of Bloom
- Futurola Amsterdam
- The Patch Co.
- Kiva Confections
- CBD Living Water
- The Original Ceeby Dee’s
- Soko Cannabis Creations
- Heavy Grass
As cannabis continues to make major strides in legalization, specialized marketing and licensing development will play a key role in the success of the cannabis industry. As examples, Cresco Labs, a vertically integrated cannabis company, and Canopy Growth, a Canadian based cannabis company, have both internally developed and externally acquired brands, including:
Branding is Imperative and IP Licensing is a Necessity
Cannabis is essentially an undifferentiated commodity product from the consumer’s point of view. If competitive cannabis businesses want to create any amount of sustainable market share, they need to differentiate their products via branding, brand extension, and licensing — and licensing not just of brands, but of all IP.
Unfortunately, the primary blockade to brand building for cannabis is the fact that you cannot register a federal trademark for cannabis itself; but you can apply for Common Law Trademarks on non-cannabis product. Constructing a ring of federal trademarks circling the Common Law Trademark in order to build a cannabis brand via licensing is just one solution.
This ring of Federal Trademarks often includes categories such as class 25 clothing, class 30 food and beverage, class 44 healthcare and beauty, classes 9 and 16 for publishing and paper products, class 18 for leather goods, etc.; as well as registrations in service classes 35, 38, and 41 covering various retail and service establishments as well as website and social media environments.
The core of this brand building is to have your Common Law Trademarks on your actual cannabis product, and then use the duplicative Federal Trademarks to license to third parties. Licensees can then manufacture products like apparel, smoking paraphernalia, as well as offer services like health centers and social media sites. This is how to create lasting brand value through licensing in the cannabis industry.
Licensing and Valuing Intellectual Property
In addition to trademarks and brands, how else can a company differentiate itself? One has to think about all of the company’s intellectual property, not just its trademarks and brands. In many cannabis companies, there is a wide range of IP that can be developed internally and/or via licensing, ranging from trade secrets to copyrights and from patents to cultivars.
The question then becomes: What other IP is within the company? How do we identify it, and more importantly, how do we value it? For example, how do we value brands and trade secrets as opposed to patents — or how do we value technical know-how, and how do we value complex systems that effectively run a cannabis lab testing facility?
We will explore the most accepted IP valuation methodologies in practice by looking at a brief case study of “Cannabis Corporation,” in which a theoretical company has two bundles of assets that require valuation: a trademark/brand bundle and a trade secret/technical know-how bundle.
Cannabis Corporation is illustrative of a relatively well-established Oregon based company that has many products and lots of proprietary IP, and one whose licensing program is just getting started. The company wants to license the IP within each bundle to companies in Colorado and California. In order to value the company’s two bundles of IP, we must first consider the different Standard Valuation Methodologies: the income approach, the market approach, and the cost approach.
Valuing the Trademark/Brand Bundle
To determine the value of Cannabis Corporation’s trademark/brand bundle, we relied on the income approach to calculate the present value of the hypothetical future cash flows. We accomplish this by conducting a discounted cash flow (“DCF”) analysis, which estimates the value of an investment based on its future free cash flows.
We project Cannabis Corporation’s revenue and profits into the future for 10 years, a standard DCF timeframe. While trademarks essentially have an indefinite lifespan (think about how long Coca-Cola has been and will continue to be around), for the sake of simplicity we have limited our projections to only 10 years. We then discount those future cash flows to the present, and allocate an average trademark/brand value percentage that is derived from public company filings during a merger or acquisition where the company places a value on its IP. Below, in Figure 2, is a summary of our trademark/brand bundle analysis.
Valuing the Trade Secret/Technical Know-How Bundle
To value Cannabis Corporation’s trade secret/technical know-how bundle, we employed the cost approach. This valuation methodology reflects the cost that a company could avoid by purchasing, rather than duplicating, a similar development effort. The annual trade secret/know-how value that the company will charge to license this IP is based on the time, labor, and other inputs necessary to maintain the system on an annual basis for the remainder of its useful life.
We apply the annual IP costs to the entirety of its useful life, in this case just five years, and then discount those annual amounts back to a present value of $1,573,347. Although trade secrets and technical know-how are significantly important for the development of cannabis products, consumers generally make purchasing decisions based on brand name and the qualities associated with that brand.
Brand Development and Social Media
Cannabis products have the unique ability to offer both an “experience” and a tangible, enjoyable product. There are two distinct types of cannabis: indica and sativa. While indica strains are generally calming, sativa strains provide more stimulation and are often paired with social interactions or the creative process. Each strain (or a hybrid of the two) offers a relatively predictable “experience.”
Social media has become a way to curate and share one’s own experiences with the world. If branded properly, cannabis has the potential to become a family of lifestyle brands, embodying similar values and interests for a wide multigenerational group. Cannabis is a diverse product which can be consumed in various forms – – baked, eaten, put in medicinal creams, inhaled or ingested in many variations. Therefore, different forms should be branded to fit many different lifestyle markets. With today’s technology and social media, it is easier than ever to tailor a specific brand identity and reach the customers most likely to identify with them or the “experiences” that the brand curates for all to see.
Future of Cannabis Branding
A total of 12 states have fully legalized cannabis while 21 states have legalized cannabis for medicinal purposes. The outlook for the cannabis market is promising, as large national companies, such a Molson Coors Brewing Company, continually test the waters with potential cannabis infused products. Growth will be on all fronts, from branding to manufacturing to growing (i.e. cultivation, soil, lights, and operating procedures). Additionally, merger and acquisition activity will continue to increase as more multinational players enter this exponentially growing industry.
Over the next decade, as cannabis legalization becomes more widespread, and perhaps federally legal, corporations small and large will concentrate their branding and licensing efforts to differentiate their products from the competition. Consumers can expect a major increase in various types of branded cannabis products resulting from increased brand development. And with new types of cannabis products, an abundance of licensing opportunities follows.
The two questions that remain are: 1) where is licensing headed; and 2) will cannabis brand development continue in-house? Nothing in this world is certain; however, cannabis licensing looks poised to generate strong returns as cannabis popularity continues to grow. Large multinational companies are not only investing in cannabis companies, but also examining how to incorporate cannabis into their own products. We believe that in-house cannabis brand development will continue to increase as corporations develop experience in honing and adapting existing products and brands to fit consumers’ evolving lifestyles.