Despite the increasing acceptance of medical and recreational marijuana, it will take a while for the cannabis industry to emerge from the shadows of nearly a century of political demonization. While a lion’s share of entrepreneurial attention is focused on cultivation, edibles, and dispensaries, some forward-thinking businessmen like Arnold Heckman and Andy Rickert are identifying huge opportunities in ancillary products and services.
How It Was Started? Detailed History of Cannaline
In 2009 Arnold and Andy started Cannaline, which offered a variety of packaging options for cannabis products. Their journey from mainstream corporate America to the cannabis industry—which still prides itself on its renegade and guerilla roots—was informed and driven by left-brain business savvy and right brain creative expression.
From Fashion Industry to Cannabis Industry
Throughout his career, Arnold has been involved in a number of industries. He began in home furnishings, which he describes as “somewhat of a fashion industry. I went to work for a Virginia manufacturer and ended up opening a chain of high-end furniture stores for them in Houston, Texas, when the city was booming.”
Arnold spent three years in Texas until a fire at the furniture factory led to the stores closing. “My wife and I came back to Maryland and opened Corporate Investment, a business and commercial real estate brokerage firm.” He says the model was similar to a real estate brokerage, “but a lot more complicated. We were a boutique mergers-and-acquisitions firm for smaller businesses. Our sweet spot was in the $250,000 to $10 million range. And we did that for more than 30 years.”
When Recession Hits the Market
At the company’s peak, Arnold had more than sixteen brokers working for him and the company closed nearly 1,500 transactions. And then came the Great Recession in 2008. “The economy made that a very challenging business. You just couldn’t get anything financed,” he recalls. “Fortuitously, I had a friend, Steve DeAngelo, who had opened Harborside Health Center—currently the largest dispensary on the planet—in Oakland, California. He’s from the DC area, and on one of his visits back we got together for lunch.”
Cannabis Industry Market Exposure
They talked about the cannabis industry, and Arnold posed the question that would set him on a new career path. “I asked him what some of the challenges were, and he said one of them was getting quality packaging.” The primary purpose of packaging is to keep the medicine fresh, but at the same time, it would ideally also provide added perceived value and promote the dispensary’s brand. “Steve was having a difficult time getting any packaging companies to take him seriously. Back in 2007, the fact that it was a cannabis-related business meant people didn’t understand it or want much to do with it,” Arnold chuckles.
Even though medical marijuana had been legal in California since 1996, it was still outside the mainstream business establishment. “It didn’t have the exposure that it has now,” Arnold notes. “And nobody understood the business or what he needed. So I said: Steve, it seems fairly simple to me. At the quantities you are using, you should be able to go off-shore and have them custom made to your specifications, and bring them in.”
Steve said in a later interview that at the time Harborside was using “polyethylene baggies for our grams and a higher grade plastic bag for larger sizes, although we were stuck with stock sizes that were often a compromise, and we had to hand-apply the labels.”
The dispensary also used glass jars for their top-shelf offerings. Glass was, and still is, considered the gold standard for cannabis packaging. They ordered from a candle jar company, but the jars would often arrive broken, the lids didn’t fit well, and they didn’t have a particularly good seal. They’d use what they could and hand-apply labels.
Arnold says he told Steve: “There’s has to be somebody in California with import-export connections. They should be able to just source it for you, and bring it in for you. To me it seemed pretty simple. So Steve looked at me. Arnold, why don’t you go have them made, and I’ll buy them from you.”
Steve didn’t have to ask twice. Arnold reached out to Andy Rickert, a business acquaintance he knew from his Corporate Investment days who was already in the import/export business. Andy owns skinconsultation.com that produces high-end skincare products in the US but imports its packaging through contact in Asia, giving Andy the experience Arnold knew the new company would need.
So, when the opportunity with Steve presented itself, Arnold told Andy: I’ve got an interesting opportunity for us, if you’re interested and told him what it was.
Andy admits he was more than a little surprised. “Honestly, I was shocked because I was very much brainwashed like a lot of people are—not just in this country, but throughout the world. At the time I was thinking that cannabis was like cocaine, heroin, and LSD. So when Arnold asked me, I was like: Are you kidding me? But then he gave me the education I should have had a long time ago; the education everybody should have.”
Once fully informed through Arnold’s input and his own research, Andy’s perspective did a 180, and he agreed they had a golden opportunity to fill a much-needed niche. “I had acquired a skincare company back in 2003, and it taught me that packaging is critical,” Andy says. “Look at Estée Lauder; it’s the packaging that sells more than the product itself. Some entrepreneurs get it, some don’t.”
Andy notes how at the beginning of legalized medical cannabis, not all of it was good. But now nearly everyone knows how to grow it properly, so the difference between the best and the average keeps getting smaller and smaller, which makes packaging even more critical to getting noticed and establishing your brand.
Arnold laughs remembering how he went from suit and tie to blue jeans and T-shirts working in Andy’s basement. “Now, it was a nice basement. He had a fairly big house, so we had adequate room. We installed an IP phone system, and we had computers, and we had Skype, and we just started working.”
Arnold and Andy collaborated closely with Harborside to determine what product designs would best meet the dispensary’s needs. “For one, they needed glass jars that actually fit together,” Arnold says. “They would get jars where the bases came in one box and the lids in another, and it was just fraught with problems.”
Also, after doing an analysis of the cost of buying labels and the labor to put them on, they determined that for the same price, they could fuse decals that would never come off onto the glass jars, which provided a far superior product.
“So we ordered the glass jars and, of course, I thought it would be very simple,” Arnold says. “I quickly found out that when it comes to manufacturing, nothing’s simple. We definitely had our growing pains trying to get things dialed in; that’s an ongoing issue with overseas manufacturing. But I’m happy to say that at this point we’ve got it under control. Now we are big customers to our factories, so they pay much more attention to quality control than they typically would for smaller customers.”
Andy says that when he and Arnold started Cannaline, they thought an initial investment of about $100K would be enough money to reach a breakeven point. It ended up taking several hundred thousand. “That was due in part to the rapid demand for our products, which forced us to buy and stock more and more inventory,” Andy explains.
It’s a bit ironic that Cannaline outsources because the cannabis industry has a long tradition of supporting local communities. But Arnold says it was both a logistics and cost issue. “I initially tried to source in the US and talked to several manufacturers, one of which told me their minimum order quantity was one million units, and that they would not do any decorating on the jars. To get that done I’d have to ship them to another company, and then ship them again to my warehouse. And then they told me the custom molds for what I wanted would be $75,000. We produced the same molds in Asia for a fraction of that and had the ability to manufacture custom items in much lower quantities.”
Cannaline started with jars and then looked for a container suitable for concentrates. “The only thing available was a small, plastic, cube-shaped box that was affectionately known as a cubie,” Arnold says. “But they were very expensive—upwards of 50 cents each—and they didn’t have a good seal because it was just a friction fit. We looked at that and thought there had to be a better way.”
The first criterion was shape. He wanted it round, so there were no corners for the concentrate to get stuck in; second, it needed a lid that screwed on, so it didn’t come open in a user’s pocket. Cannaline developed a custom mold for a small concentrate container and they were able to retail it for 15 cents. “That was a big hit,” Arnold says. “And that design led to other units made of acrylic and then silicone. Now, we have one in glass.”
Arnold says building a client base happened organically. It was mostly word of mouth and the Internet. “One of the smarter things we did was to concentrate on optimizing our website. At the time, there were really no dedicated cannabis packaging companies, so it didn’t take long before we were on the first page of Google when you searched for marijuana or cannabis packaging. We never paid a penny for pay-per-click. That web optimization allowed people to find us, and unlike many web-based companies, we wanted people to call us. That’s what we’re all about. Our whole business model was designed to find out what our customers needed and then to create a cost-effective solution.”
They quickly outgrew Andy’s basement, and the executive offices are now in a three-thousand-square-foot facility, with an additional distribution center on the west coast. But their strategy remains the same: commitment to customer service and being more innovative than the competition.
“Since the beginning, a lot of what we’ve done has been to custom develop products that nobody had,” Arnold says. “Of course, I normally only get a six-month jump before other companies just copy them,” he sighs, adding that product development is now his primary focus. “It’s an ongoing process that never stops. I’ve got a number of interesting and revolutionary new packaging ideas in the pipeline right now.”
Cannaline continues to have close professional ties to Asia. Andy says they maintain a warehouse there, which enables them to check products for quality and provides a place to stage their inventory prior to shipping. “It’s expensive to ship,” Andy notes, “so we ship in 40-foot containers on a regular basis. That’s one of the ways we keep the cost down because even though we believe we have the best quality, we still have to be competitively priced.”
Arnold adds: “Our associate in Asia is a great resource for us. I work with him almost daily on product development, and he has many connections there with manufacturing companies. He checks out the manufacturers, ensures quality control, and works with them to produce products based on our specifications.”
Arnold says they have investigated the possibility of making some products using hemp polymers, “but the technology is not quite there yet,” he reports. “A lot of people advertise that they have hemp plastic, but they don’t. It’s just not cost-effective, so nobody’s really doing it to any degree—yet. This industry is very quality-conscious, but also very cost-conscious. So you’re always balancing that. I’ve had a lot of people say they’d love to get plastic bags made out of hemp, or a biodegradable material, and we want to supply them, but we’re not quite there yet as far as affordability and technology. We could do it now but it’s going to feel like a potato chip bag and cost two or three times more. Once they hear that they say: No, that’s okay. Your current bags are fine,” he laughs.
Until industrial hemp is established, Cannaline will continue to utilize existing materials in innovative ways such as the flexible packaging for the smell-proof bags. Arnold admits, “Making a bag as smell-proof as possible—and at the same time have it seal well and keep the product fresh—was a technical challenge due to the nature of cannabis. But smell-proof bags were, and are, a big driver of the growth of the business.”
But with success comes competition, which has been increasing in recent years. “Our niche has been the ability to supply great quality products and custom-print them at no additional charge. We were promoting that six years ago, and it was one of the things that Harborside was very big on. They wanted to logo everything that went out the door because cannabis is basically an agricultural product with no intrinsic brand. It analogous to a plain banana that once branded becomes a Chiquita banana”
Steve agrees. “Never underestimate the importance of branding. As our industry matures the dispensaries that thrive will be the ones that understand the importance of branding and that promote their brand at every opportunity.”
Arnold says that message is clearly getting through. “Now everybody is starting to realize that you have to brand your cannabis products. They’ve really jumped onto the bandwagon, so not only do we have a good selection of stock solutions that people will put labels on, but we also do a significant volume of custom-printed packaging solutions.”
Aware that many startups are cash strapped, Arnold argues their services offer a tremendous value. “The minimum order quantities are not that high, if you’re doing a reasonable amount of the business, and it’s considerably more cost-effective than hand applying labels. We can provide a custom-printed bag for the same price as a plain bag. When the bags are manufactured, whether you print them or not, the material’s the same. Our additional cost is in making the printing plates, but if you order a reasonable quantity, we will absorb that cost. We have developed a real niche for that, one that people have tried to copy.
“But so far, from what we can see, those competitors have not had the kind of success we have because it’s hard. You need a technically-adept factory, technically adept designers, and you have to have strong quality control to make sure they are produced to specifications. If our customer is not happy, we’re going to make them again. That’s the arrangement we have with our factories: if they don’t come out right, they have to be remade. We’ve built the business on customer satisfaction and have picked up a lot of business because people have been unhappy with the custom printed packaging from some of our competitors.”
Andy adds: “When we started, we had a friend who did the custom design work we needed. But at the end of 2013, we had so much work we hired a professional designer. He’s a graduate of a top design school and knows both the artistic, creative, and technical aspects needed to create great designs. Then, in the middle of 2016, we hired a second designer, as it was clear that there were not enough hours in the day for one designer to keep up with the demand. Now we have two full-time, high-end, professional designers to work on customer requests for custom packaging.”
Arnold says, “As the cannabis industry matures, it’s becoming more professional as entrepreneurs start adopting basic business principles and marketing strategies, along with the realization that professionally designed packaging can be a critical component to their success. We introduced the importance of having quality packaging. When we came into the industry, almost everyone was using cheap poly bags.”
Arnold admits it has sometimes been an uphill battle convincing small dispensary owners and start-ups on the value of custom packaging. “I often say that you can put a Tiffany ring in a K-Mart box, or a K-Mart ring in the Tiffany box, and people will take the Tiffany box every time. You can have the best product in the world, but if no one looks at it, it will never sell.”
With every state that legalizes cannabis, Cannaline’s pool of potential customers grows—as does their competition—so remaining the packaging leader becomes more challenging with each passing year.
“Everyone who comes into the market has one proven way to penetrate the market and that’s to sell cheaper,” Arnold notes. “We started the same way. We looked at this market and believed we could sell a better product for less than what was then available. And that’s what we did by manufacturing in large quantities, which we still do, and passing those savings on to our customers. Now I see some companies offering similar-sized bags—but not necessarily the same quality—for a penny less than ours. Undercutting us on quality, and therefore price, is the only way they’re going to get the business. We could make that same bag for two cents less but have no intention of compromising our reputation by providing a lower quality product.”
Arnold says he knows he’ll lose some clients who only consider cost as opposed to value. “Look, I could make products cheaper than anybody, if I was willing to compromise the quality. When I design products I never say to my factories: I want a product that’s going to cost X because then my factories will try to figure out a way to do that by cutting corners. Instead, I say: Here’s what I want. I want it top quality. I want it to be the best it can be for what we’re trying to do. How much is it going to cost? Sometimes the price point doesn’t work for us but most times, in the quantities we order, it does. I want our factories to make money. I want Cannaline to be important to them.”
In general, it comes down to a quantity issue. “If I order 30,000 the price is X; if I order 250,000, it might be 30 percent less. Some small businesses can’t afford the mold cost for custom products or the inventory necessary to get the best prices. If we think the product is ultimately going to sell millions of units, we’ll absorb the cost of the mold and order in large quantities to bring the overall cost down.”
The same philosophy drives the design process. “If I see a flaw in the design, that means the factory has to make a new mold. In the end, it costs us a little more but results in a superior product. By designing this way, I tend to get a top-quality product because I’m not forcing the factories to cut corners, which they will do to meet a price. They’re used to giving a price and then having the client say they want it for half the price. But then you’ve got problems all the way down the line because it’ll look like what you specified, but it won’t be what you specified. So our approach is different. Our attitude is: Let’s just do it without compromise, and make a better product. And we’ve built the business on delivering a no-compromise product.” And, Andy adds, by following the philosophy that “every client is our most important client.”
Although they anticipate the company will continue to grow, in the end, Arnold and Andy are more concerned with quality than quantity. “I have no illusions about necessarily being the biggest,” Arnold says. “I just want Cannaline to be the best. We’re never going to be the Walmart of packaging. That’s not what we’re about. We want to provide exceptional customer service with the highest quality products at a fair price. As long as we continue to do that, the rest will take care of itself.”