“COVID-19 has hurt our retail business a lot, as the vast majority of our accounts are independents and offices and fitness studios and people are not at Penn Station buying Recess before they get on the train or grabbing lunch in lower Manhattan,” said founder Ben Witte, who will be speaking at our‘Where next for hemp & CBD?’ webinar tomorrow at 9.30am PT.
“But our e-commerce business has been up 4x since COVID hit. And that’s before we launched our new platform,” added Witte, who launched his sparkling water infused with hemp extract (10mg CBD) and adaptogens online 18 months ago and went on to strike deals with distributors supplying retailers in New York City, Los Angeles, Miami, Austin, and Chicago.
“Our brand has been digitally native from day zero; my thesis was that in the past, brands were built on shelf and now they’re built on your phone, which changes how you build your brand and your distribution model. So for the past year we’ve been slowing down in order to speed up, build our infrastructure that will allow us to scale.”
'It costs the same amount of money to ship a can of LaCroix or Coke, but Recess is a much more premium drink'
The new website features a subscription service for consumers and a new b2b portal enabling retailers and other businesses to purchase wholesale quantities of Recess at wholesale prices, he explained.
“We’re getting a lot of inbound leads from retailers and distributors from around the world that want to carry Recess but we haven’t been able to support them because we only have DSD distribution in a few markets, but there are cafes and regional grocers all over the country that want us, so this [b2b platform] allows us to sell Recess at wholesale prices at a set of economics that make a huge amount of sense to us.
“Our strategy is to seed the market through this and then transition that relationship over to a distributor [once there is sufficient volume/demand in a given area]; we’re building traction and awareness in markets before we launch with them.”
While shipping beverages – which are heavy - is expensive, “the economics of e-commerce make sense for us,” he claimed.
“It costs the same amount of money to ship a can of LaCroix or Coke, but Recess is a much more premium drink, so the math makes a lot more sense to build a scalable and profitable e-commerce business.”
‘We compete with everything from LaCroix to Budweiser’
Ongoing regulatory uncertainty (many large retailers won’t stock products without a green light from the FDA) coupled with a pandemic have created short-term challenges, but the market opportunity in the long-term remains enormous, he insisted.
“One of our taglines is ‘an antidote to modern times,’ and when I came up with that I didn’t think we’d be facing a global pandemic. COVID-19 makes Recess even more pertinent for this moment.
“This could be even bigger than energy. Most people don’t drink energy drinks after 5 o clock, whereas we compete with everything from LaCroix to Budweiser.”
Not everyone can afford to spend $5 on a can of Recess on a daily basis during a recession, he conceded, just as they can’t afford kombucha or a Frappuccino, but for those who can, "this is not just a beverage that tastes really good, it’s a functional beverage and the value proposition just got a whole lot more desirable.”
He added: “Another reason I’m so excited by this category of CBD and calming beverages is just how many consumer occasions we observe for ‘taking a recess,’ whether it’s when you wake up, before you go to bed, while you’re working during the day, as a substitute for afternoon coffee, or as a substitute for alcohol.
“That also means that Recess works in a lot of different channels, from a yoga or fitness studio, to retail grocers, to bodegas, to a hotel mini bar or a nightclub. There aren’t many brands I can think of that work in a gas station as well as the Waldorf Astoria Beverley Hills.”
'The game hasn’t really even started yet [for CBD-infused beverages]'
Right now, the market for CBD-infused foods and beverages is still in its embryonic stages, he said.
“Regulatory prevents us from launching in the national retailers yet, even though everyone wants it, so the game hasn’t really even started yet. When Whole Foods and Target launch this category, they are going to launch with massive end caps."
That said, there's little doubt that there will be some kind of shakeout this year as CBD brands that don't have the capital to take a longer-term view struggle to stay afloat, predicted Witte, who raised a series A round last year.
"There's typically three winners in a given category and it's going to be very hard, there's too many brands, so there's probably going to be a thinning out as the regulatory environment is challenging, there's COVID-19, and the fund raising environment has become a lot softer."
The Farm Bill removed hemp from the controlled substances list but it didn’t mean CBD was going to go into drinks that sell in Target overnight
As for the regulatory piece, the FDA says it is unlawful to introduce foods or supplements containing added CBD into interstate commerce, but has at the same time focused enforcement activity on brands making "egregious" claims (rather than demanding that all CBD products are recalled), which has created fertile ground for civil litigation, said Witte, who sits on the board of industry association the US Hemp Roundtable.
“There was a misconception about what the 2018 Farm Bill accomplished. It removed hemp from the controlled substances list but it didn’t mean CBD was going to go into drinks that sell in Target overnight. There will be a process to determine testing requirements and maximum dosages etc. The problem is that in the meantime, you’re allowing these fly-by-night beverage companies that aren’t taking quality and compliance seriously, and the retailer don’t know what regulations to adhere to [when vetting suppliers].
“It’s frustrating because it’s one of the few issues that has bipartisan support. Hemp farmers also need beverages [to be permitted as a delivery vehicle for CBD] in order for hemp to become a viable crop for them. The market just for oils and tinctures is not big enough.”
‘It’s like saying if you have 100 Red Bulls a day you might have a problem, well yes…’
He added: “Is the FDA moving slower than I would like? Yes, but there’s a lot happening behind the scenes and we take a long-term view."
As for safety, the FDA has expressed concern about potential cumulative exposure to CBD via consuming multiple foods and beverages in a day, he said. However, warning people about associations between CBD and liver damage based on studies of rats fed 1000+miligrams of CBD isolate every day were “somewhat disingenuous,” he argued.
“Recess has 10mg of CBD, so it’s like saying if you have 100 Red Bulls a day you might have a problem, well yes, you might.”
FREE WEBINAR: Where next for hemp & CBD?
Join Ben Witte at Recess, Sharon Leite at Vitamin Shoppe, Eric Schnell at Mood33 , Will Kleidon at Ojai Energetics, and Greg Kaufman at Eversheds Sutherland to explore the market for foods and beverages containing hemp-derived CBD at our FREE webinar, Where next for hemp and CBD? tomorrow, Wednesday May 20, at 9.30am PT.