Almost all small-business owners dream of the day when they can expand nationally. This has proved to be a unique challenge for those in the marijuana industry because the products they create are illegal under federal law, and the checkerboard of states that permit marijuana sales have complex and constantly changing regulations.
Dixie Brands, a company in Denver that creates drinks and other products using marijuana, is aiming to navigate those hurdles and become one of the first companies in the industry to build a national presence.
Voters on Tuesday brought that dream a little closer to reality. California, Massachusetts, Maine and Nevada approved adult-use (a new term for recreational use) marijuana. Florida, Arkansas, North Dakota and Montana voted to legalize or expand medical marijuanause. Twenty-eight states and the District of Columbia now have some sort of allowed use.
The legal cannabis industry is dominated by small businesses operating in individual states, so these new laws could open significant prospects for entrepreneurs. And for the companies that can figure out how to operate in multiple states, the opportunity is tremendous.
GreenWave Advisors, a financial research and advisory firm based in New York, estimates that marijuana product sales in the United States will be $6.5 billion in 2016 and about $30 billion in 2021, if products derived from marijuana are legalized in all 50 states in some capacity.
Chuck Smith and Tripp Keber, who founded Dixie Brands seven years ago, have been taking steps to be at the forefront of the growing market.
The company makes Dixie Elixirs, bottled beverages infused with THC, the psychoactive ingredient in marijuana. It also makes THC-infused chocolates, drops and topical lotions. All are sold at licensed recreational pot shops and medical marijuana dispensaries. Low-dose "awakening" and "relaxing" mints containing five milligrams of THC (half a serving) are among the company's top sellers. Most of the company's revenue comes from Colorado.
Because of federal laws on controlled substances, one challenge to expansion is that products cannot cross state lines, so a pot brownie baked in Oregon, for example, cannot be sold in neighboring Washington, even though the product is legal in both places.
Add the complications of financing as well as unique packaging, distribution and marketing laws for each state, and establishing a national brand seems daunting and expensive. Some states require marijuana businesses to be owned by in-state residents, further impeding multistate expansion.
Also, because the industry is in its infancy, rules are changing constantly, including regulations governing packaging, food production and agriculture management. When Colorado recently required all marijuana food products to be stamped with a THC symbol, Dixie Brands had to create all new molds for its chocolates and discontinue their Dixie Roll product, which is similar to Tootsie Rolls, because it could not be stamped efficiently. The new rule requires a THC stamp on all packaging as well.
"These changes are costly for small businesses," said Joe Hodas, chief marketing officer for the company.
In addition, because of federal laws, marijuana companies cannot open bank accounts, cannot use credit cards and cannot deduct business expenses from their federal taxes. Giant safes full of cash and pickups by armored cars are the norm.
Many companies in the marijuana industry had been started by product aficionados with little business experience. As legalization spreads, the industry is quickly drawing more business professionals, as evidenced by Mr. Smith and Mr. Keber, who began their endeavor with experience in corporate finance, marketing and management.
When recreational marijuana joined medical marijuana as a legal market in Colorado in 2014, they were poised to expand Dixie Brands by adding to their line of products. Since that time, the number of employees has expanded from 20 to 100 and sales have increased about sixfold.
Expanding beyond Colorado, however, has taken creativity. Two years ago, in their first move outside of the state, the pair found a licensing partner to produce Dixie products in California. After a year, the founders decided to take a more hands-on approach.
"Our partner wanted to manufacture other companies' products as well as ours, and we wanted more focus on absolute quality and consistency," Mr. Smith said. "To have total legal, financial and operational control, we decided we would need to control the manufacturing and distribution facilities in any state we expanded to."
To make this happen, Mr. Smith had to find a way to work within regulations that require owners of marijuana businesses to be residents of the state. He decided that Dixie Brands would own and run anything that did not "touch the plant" and therefore was not subject to local ownership regulations. A local partner would grow and process the marijuana, but only for Dixie Brands, and only under the company's strict instructions.
Consistent product quality is critical, Mr. Smith said. "Coca-Cola in Denver and Seattle taste exactly the same, and we want Dixie Elixirs and our other products to have that reputation."
Each new manufacturing site will cost about $2 million, according to Mr. Smith. The Dixie holding company will own and control a building that they will rent to the partner as well as the equipment that will be leased to them. All of the noncannabis raw materials and packaging, and the accounting, marketing and legal services, will be provided by Dixie Brands.
The state-based partner will own the marijuana itself and employ the personnel who work with the marijuana in any form: plants, concentrates, finished products and the like. This will allow Dixie to control the business while maintaining a clear separation from the federally illegal aspect of it. That separation also protects their investors and gives the company flexibility to react to changing state and federal regulations.
To finance the expansion, Mr. Smith says he has tapped a handful of investors from among the 30 who have funded his efforts over the last seven years. Those sources helped to open manufacturing facilities in Arizona and Nevada last month, and one is scheduled to open early next year in Washington State.
For efficiency as it enters new locations, Dixie Brands follows the most stringent state's laws in each area of its operations. For example, Colorado has the strictest packaging requirements encompassing child-safety measures, clear dosing and single-serving packaging. The state also bans cartoon or other child-friendly images, and has many other regulations.
Dixie Brands uses those packaging rules for the products they make in every state. "If it is safe enough for Colorado, it will work for the other states," Mr. Smith said.
The company also uses the cleaner carbon dioxide extraction method to strip the oils from the plants instead of butane, even though it is not required everywhere.
Colorado also requires multiple rounds of product testing in the manufacturing process, including testing of the raw plants, the extracted oil, batches of products and individual packages. Dixie Brands uses these guidelines everywhere it operates.
"We want to have the highest level of precise consistency and quality control, so we follow Colorado's rules, even in states that are less strict," Mr. Smith said.
Very few brands have made it to multiple states in the fragmented legal marijuana industry, so Dixie Brands is being watched closely. "We were pioneers to begin with seven years ago," Mr. Smith said, "and I think we are well positioned to take this leap."
Correction: November 9, 2016
An earlier version of a picture caption accompanying this article had transposed the names of the founders of Dixie Brands. Tripp Keber is on the left, and Chuck Smith is on the right, not vice versa.