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Tobacco, e-cigarette makers likely to compete in cannabis market, Ionic CEO says

S&P Global Market Intelligence

Cannabis Hashing Out a Budding Industry

The Market Intelligence Platform


Tobacco, e-cigarette makers likely to compete in cannabis market, Ionic CEO says

➤ Major tobacco and e-cigarette producers, including San Francisco startup Juul Labs Inc., are likely looking to enter the cannabis space, Ionic Brands Corp. Chairman and CEO John Gorst told S&P Global Market Intelligence.

➤ A patchwork of cannabis regulations across U.S. states creates a difficult environment for makers of cannabis products to maintain consistency or achieve economies of scale, said the cannabis company executive.

➤ While companies are rushing to take advantage of the sales potential for products including cannabis compound cannabidiol, Ionic remains focused on products that include THC, the main psychoactive component.

Washington-based Ionic Brands sells its luxury cannabis vaporizers and oils in four U.S. states and some international markets. The company is buying Astleys of London KH Ltd., a brand that began as a London-based pipe shop in 1862 but relaunched recently as a producer of cannabis vaporizers. Ionic Chairman and CEO John Gorst recently spoke with S&P Global Market Intelligence to discuss the acquisition of Astleys, the company's overall strategy and other issues affecting the cannabis industry. The following is an edited transcript of that conversation.

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Ionic Brands Chairman and CEO John Gorst
Source: Ionic Brands

S&P Global Market Intelligence: When do you expect this deal will close and how soon do you expect to start selling Ionic oils in Astleys vape devices?

We've been working with Astleys of London now for about 60 days so we're already working on devices with the idea of launching an Astleys product in about 90 days. We hope to close the transaction with Astleys of London on July 1 of this year.

Why Astleys? Essentially, the brand shuttered a few decades ago and is not selling its products yet through its online store. So, what is it about this brand?

That's a great question. So, it's the heritage of the brand, right? It started in 1862 when they first started selling and manufacturing their pipes. William Astley was the founder of the company. They sold their last pipe, I believe, in 1961. They have been making handmade wooden pipes for royalty and for the lords of Britain and London for over 100 years.

With the heritage and the depth of the brand, revitalizing it into a more current status related to vaping and cannabis, we thought it was a very strong value proposition for a certain demographic of consumer we are targeting.

Ionic is, by its very nature, a premium brand, and we believe that a natural progression of our growth is to more clearly define what will become a more luxury strategy for high-end consumers. In targeting that demographic, what we call the shadow market — that being soccer moms, white-collar professionals — these are consumers that really would appreciate and do appreciate quality, luxury and premium.

Can you talk broadly about the makeup of the cannabis vaporizer industry? Who's making most of the devices and how quickly is the industry growing?

Vaping is the fastest-growing segment in cannabis, period. I believe year-over-year growth is about 93%. Edibles is obviously a fast-growing segment, which we're in. We recently acquired Zoots, which is an edibles manufacturer in Washington. Edibles, concentrates and vapes, specifically, are the fastest-growing segments of cannabis. Fewer and fewer people are consuming [the dried cannabis] flower, just for health reasons, for discretion and privacy. We believe that we correctly targeted the vape market seven years ago, and we've been participating in that strong, organic growth ever since.

Altria, the tobacco company, is investing in cannabis, and cigarette companies are getting more and more into vaping with their own e-cigarette lines. Do you expect big tobacco and companies like, maybe Juul, to compete in this space?

I would expect that Juul would probably enter the space at some point. They're going to do that through an acquisition. [Juul did not respond to a request for comment from Market Intelligence.] We know for a fact that big tobacco is looking to enter the market. ... For us, from our perspective, there are a lot of competitors in the vape category. Again, what we're trying to do is really redefine the conversation, speak to a different demographic, a higher end, more educated, white-collar demographic. We believe that will create value for somebody. We believe that one of our potential suitors would be big tobacco. It could be alcohol as well.

How is the regulatory landscape in the U.S. affecting how you approach developing products and product availability?

It's a very complex problem. Being a multistate operator — we're operating in Washington, Oregon, California, Nevada — you're constantly dealing with change in the industry. Simple things like packaging, packaging design, packaging content. It's very difficult to be consistent and get economies of scale out of the business so that's a big challenge for sure. And then, of course, just dealing with the overall regulatory environment at the federal level. We really try to stay focused on executing our business plan.

So, there continue to be challenges but we're very adept about those challenges. We migrated from medical into recreational in the state of Washington, we migrated from medical to recreational in Oregon, so we have a lot of experience dealing with change.

How are you looking at the federal government's attempts to regulate hemp-derived CBD? Is that something that your company plays in and something you might develop as the regulations take shape?

We're already playing in that space, in both hemp-derived and cannabis-derived CBD. Right now, there's a spike of interest in CBD at the consumer level. It's hard to get away from. I know there are a lot of THC companies in the country that have changed their direction because of CBD. Some of them have abandoned their THC strategy in favor of a CBD strategy.

From my perspective, I don't share that enthusiasm. I think it's going to become heavily regulated by the FDA. I think that will probably happen next year and the companies are going to have to be prepared to deal with that regulation. While we're bullish on CBD and want to participate in it, it's not our core focus. We believe that it's a product line for us to definitely focus energy into developing but it's not our core business. Our core business is THC or the combination of THC and CBD in the markets we operate in.