IBIE 2016

Growing against regulations: Cannabis edibles industry’s significant profit margins are yet to be seen, Colorado marijuana bakers said

By Douglas Yu contact

- Last updated on GMT

Marijuana bakers said they reinvest their profit margins to keep up with new regulations.
Marijuana bakers said they reinvest their profit margins to keep up with new regulations.

Related tags: Baking

Experts from the cannabis edibles industry have shattered the popular belief that manufacturers of cannabis-infused bakers are able to make large profit margins due to the growing cannabis market. 

The fact is that most of the manufacturers have to reinvest their profit due to the constantly changing regulatory environment, according to the education session “The Future of Wholesale Baking with Marijuana”​ held during IBIE in Las Vegas, Nevada.

The session was presented by two Colorado-based edible wholesale bakers, including Sweet Grass Kitchen and Love’s Oven. They both provide a large portion of cannabis edibles to Colorado, the first state that legalized the recreational use of marijuana in the US.

The current status of marijuana in the US

Marijuana is currently legal for recreational use in four US states; 20 other states use marijuana for medical purposes. In November this year, nine more states will have validated initiatives for either recreational or medical marijuana.

Marijuana baked goods are significant in cannabis sales

In more mature cannabis markets, such as Colorado and Washington, edibles have posted 50% of total cannabis sales, according to Sweet Grass Kitchen’s director of marketing, Jesse Burns.

“Baked goods make up a very significant portion of cannabis sales,”​ he said. “Other categories besides edibles include flower (the traditional smoking bud), concentrates and topicals.”

Market graphics
Share of total Colorado cannabis and cannabis edibles markets in retail dollars, year to date January through August, 2016. Source: BDS Analytics

Even though the two main ways of using cannabis are still through inhalation and oral ingestion currently, edibles are considered the future marijuana consumption for adults, said Sweet Grass Kitchen’s founder and CEO, Julie Berliner.

She explained that, since edibles are processed through different organs in human bodies, they are healthier and odorless.

“Edibles are anything from chocolate to candies and gummies, drinks and baked goods,”​ Berliner added. “Baked goods are about 10% of the cannabis market. The cannabis market in the nation is projected to reach to $27bn by the end of this year.”

Ten times more expensive than the regular baking industry due to regulation

To compare between the infused bakery and non-infused bakery, Love’s Oven’s executive chef, Hope Frahm, said, “if you burn 20 sheet pans of cookies in your oven, that’s $200 to $300 cost of labors and ingredients. But for us, it’s $1,800 to $2,000, and wasting cannabis [after THC/CBD extraction] will go through a more expensive process.”

The leftover cannabis after extraction, according to Frahm, has to be destroyed by bakery employees on camera, and locked in a compost container and sent to a compost facility.

Using cannabis in baked goods really affects the manufacturers’ cost structure much differently compared to the regular bakeries, COO of Sweet Grass Kitchen, Eric Knight, added.

“Packaging and labeling, due to the regulatory environment, are a significant chunk of our cost. They put pressure on our growth margins,”​ he said. “The regulations also affect our equipment, material handling, process control and inventory management. The reason why we do these things is to achieve the pharmaceutical level, portion control and repeatability.”

The dispensaries that carry cannabis-based goods are more like a pharmacy than a retail outlet with all the products being packaged in opaque, heavy child-resistant packages, according to Knight. And the packaging is also very expensive for the manufacturers.

In addition, licensed marijuana bakers also have to pay around $16,000 per month to the State of Colorado and the City of Denver for product testing conducted by a verified third-party laboratory.

Changing labeling rules impose challenge

In addition to two packaging changes during his two years with Sweet Grass Kitchen, Knight added the company had also done three labeling changes.

For example, a recent law in Colorado requires that THC-included medical and recreational marijuana symbols must be imprinted on the packaging and products by the end of October 1, 2016, Burns told BakeryandSnacks.

Symbols
Colorado law requires that THC-included medical and recreational symbols must be on packaging and products

“The main challenge is that it’s very difficult to stamp a baked good like a chocolate chip cookie. We don't make Oreos. This new law has forced us all to spend a lot of capital on new machines and capabilities that are way above what a non-infused bakery of our size would typically have,”​ he pointed out.

“Sweet Grass Kitchen is using a class-4 laser to engrave all of our products and Love's Oven is using edible ink to spray their products,” ​Burns said.

The labeling rule-making committee, of which Berliner is part of, is currently working on the next label change. The infused bakery industry anticipates the rules to be finalized in the next few months, according to Sweet Grass Kitchen.

Cannabutter: the most expensive part of an infused bakery business

To enhance the flavor profile and texture, both Sweet Grass Kitchen and Love’s Oven choose to use cannabutter for their products.

“We’ve chosen to use this all-natural extraction that involves heating up the marijuana leaves, the buds, and we mix it with butter. Then we separate them for a while, extract the plant material. THC extractions happen through that heat process. We separate it from butter even longer, and activate the THC through decarboxylation,”​ Peggy Moore, owner of Love’s Oven explained.

SGK
Source: Sweet Grass Kitchen

“When that process is complete, and the THC is fully activated, we sent that mix for testing,”​ she added. “We will receive a potency profile on that, including how many grams of THC are in each gram of butter.”

Cannabutter, like the finished bakeries, also needs to be tested to make sure its potency and procedures are on point, Moore said. Cannabutter is the most expensive ingredient to infuse edibles.

Positive outlook on edibles

The marijuana bakery industry leaders unanimously agreed during the presentation that they were starting to see the stigma associated with cannabis change through legalization either medically or recreationally.

“Hopefully, we’ll take a big step forward during the upcoming [presidential] election as well,”​ Moore said.

In response to the growing infused bakery market, Berliner believes Sweet Grass Kitchen and Love’s Oven are shaping a new social norm.

“The unfair stigma about this plant has been around for a very long time,”​ she said. “I hope to see that people consume cannabis responsibly instead of alcohol or other controlled substances in the future.”

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