February 4, 2019

Bootstrapping In the Food Industry’s New Wild West (PODCAST)

In today’s podcast we talk cannabis, edibles, the food industry, disruption, and how to bootstrap a budding business (yes, pun intended!). Join us as Wayne Schwind of Periodic Edibles shares his story of making his mark in this new wild wild west.

TRANSCRIPT:
Jennifer: Welcome and thanks for listening. Today we’re talking with Wayne Schwind who is the owner and founder of Periodic Edibles. Yes, we are talking about cannabis today because it is becoming a larger and larger part of the food industry. However, Wayne also tells a story that many of you can relate to and that is of needing to and figuring out how to bootstrap his own company. Wayne didn’t actually start out to become the head of an edibles company, he actually worked as a chemical engineer before starting up Periodic Edibles in 2015. Based in Oregon, the company initially sold to the medical marijuana market but received their state recreational license in 2017 as Oregon is a state that allows for recreational cannibus use. The company’s caramel edibles product is currently in over 150 retail stores.

Jennifer: Wayne, thank you for joining us today.

Wayne: Thank you for having me.

Jennifer: I’m really excited to talk to you today, because it’s a bit of this duality topic where we’re going to be talking about topics that are common to food entrepreneurs across the board. That’s like, bootstrapping your company, getting it up and running, differentiating your products, but yet, we’re also talking to you about a really interesting new niche in the food industry. I’m just going to kind of hand it over to you. Why don’t you tell us a little bit about your company, Periodic Edibles, your background, how this company got started.

Wayne: Yeah, yeah. Our company is Periodic Edibles, like you said. We make a line of cannabis caramels. We only make caramels as a company. That’s our sole focus now. It didn’t start that way, but as we evolved and kind of scaled the business, we realized there’s a huge opportunity to be very narrow and focused in that niche. Then scale distribution and create a solid brand around that. Cannabis [inaudible 00:01:05] just in Oregon. In cannabis right now, you’re really divided state by state. Every state’s rules are so different. Most states are still illegal or don’t have a program in place.
Wayne: Oregon was a great place to start. I’ve been here for about 10 years. I grew up in the Midwest in Michigan. Oregon made a very pro small business rules and regulation. The licensing, the fees, it’s not low barrier entry, it’s still very difficult to get licensed, but much more so than other states. I started the business … I went to school actually for chemical engineering. When I grew up in the Midwest, we didn’t grow up with a lot of money and math and science always kind of came easy to me, so I actually went down that engineering road, because it paid the most out of college. To me, when I was growing up, that was success. I remember thinking one day if I would ever make more than a hundred grand a year, I would just be rich. That kind of money just didn’t make sense to me, so that’s why I picked engineering.

Wayne: I always kind of had entrepreneur tendencies, like eBay, mowing lawns, when I was a kid, and always wanted to start my own business. I just didn’t know what it would be. I went to school for engineering, graduated in Michigan, and got my first job in Portland, Oregon. I moved out here to the West Coast. I did that for about five years. I worked in technical sales, so it was industrial water treatment, so power plants, lumber mills. We would seel the specialty chemicals and equipment to treat water. Then provide the services, so that the chemistry was accurate, you know discharged back to the sewer systems, very like, has to be controlled for contaminants. I got a lot of experience in sales, very technical sales, so it was very relationship building, and then chemistry. A lot of water chemistry, so still it was very technical, so I didn’t really lose that engineering aspect.

Wayne: Just always looking to start a business and didn’t really know what it would be or how, but just kind of looking for an opportunity. I actually quit that job to start a property management business with an older couple, who was actually one of my customers at Nelco, was the company I worked for. Ecolab, if people are familiar with … pretty big company. It was one of my customers. Him and his wife were starting a property management business, they said, “Hey, you’re younger. We have experience in real estate and how the systems work. My wife’s a principal broker. You understand the internet and marketing, and SEO, and these new things, or at least you can learn them, and do that kind of the business.” That gave me the confidence to quit my job. I’m like, “Alright. This is the company I’m going to start. Here’s the opportunity.” I had an older couple. It gave me a lot of confidence. I wasn’t doing it alone. I don’t know if I would’ve started this cannabis company if it wasn’t for that first company.

Wayne: After about a year, year and a half, it ended up not working out. We weren’t seeing eye to eye, kind of wanted to go a different direction than the way they thought we should go with it. There was just a disconnect there. Business partnerships are really really difficult, even if you get along great, and you’ve always been friends. We had a long relationship together, so that was really hard when I decided to walk away from that.

Wayne: At that point, I’d left my job; security, good paying job. I traveled around Oregon a lot for sales, and I had my medical care for cannabis for about three years, so I stopped into a lot of different stores. I didn’t realize it at the time, but I really was doing market research the whole time. I was just so curious and interested in cannabis. I’d used it frequently instead of alcohol to relax, help sleep, different things. I was always asking. I knew the market was evolving and “Why does this product sell?” Or “What are they doing with this formula?” Just really curious about the whole industry. When the property management failed, I was kind of ina position of, go back to work for someone else, or try to start another business.

Wayne: I had bought and sold a home in central Oregon, and made about 60 thousand dollars. I bought it in 2010, sold it in 2013 for a really good profit, so I had that as kind of my nest egg. I had time. I could still try to start another business. I was looking at cannabis and they had voted in the recreational market, so at the time, it was medical only. You had to have the medical card, see a doctor, not get a prescription, but get their recommendation. Then, you could buy products. I think it was a hundred thousand patients in Oregon, so a decent amount of people, but very small compared to recreational market, which is anyone over the age of 21.

Wayne: What that means in any state that goes through that transition, is the whole market base, or the customer base is like reset. All those new customers don’t have any brand loyalty. They don’t know who the companies were, the products were, so I saw that coming, and it was like, “Well, if we can have a product ready, and just be on the shelf early, I think we have a chance of getting marketing traction here. It’s a whole new customer base. Tons of people are going to be trying new products for the first time.” That’s when I decided to start the caramel business, basically instead of going back to work for someone else.

Wayne: The caramel was because it was really the lowest barrier to entry. At the time in the medical market, you could produce them out of your home kitchen. It was really gray. There weren’t tight regulations. We still did lab testing and things like that, but there wasn’t like a strict monitoring system like we have now in the highly regulated recreational market. I think I had five thousand dollars invested before I made my first sale to a store. It wasn’t much of an investment to basically get a prototype out there on the shelf, testing it to see if would sell, pretty quickly with a low initial capital.

Jennifer: That’s really interesting. As you were talking, there was a whole bunch of things that popped up. Again, for listeners, you may recall that I’m in Seattle in Washington. We also have recreational cannabis. I had no idea that it’s … I mean, obviously I knew that in certain states it was not legal, but I didn’t realize there would be these kind of additional hurdles to you, let’s say selling into Washington state, being based out of Oregon.

Jennifer: Also, just how you mentioned seeing it coming down the pipeline and thinking, “Wait a minute. There’s going to be all of these consumers who,” as you said “aren’t brand loyal yet, so we can capture that. We have the opportunity to capture that,” which brings me to the question of, How do you … I have so many questions. When you’ve got … you’re looking at that pipeline and you think, “okay, we’re going to have these new customers coming in,” but you’re also potentially going to have customers coming in who might not necessarily be highly educated around cannabis, and different strains, and different amounts that might be right for them, or not right for them. How did you also go about working and helping to educate …

Jennifer: Sorry, I’m going to back up for a minute. In Oregon, are you limited to strictly selling through dispensaries?

Wayne: We are, yes, right now. There’s a caveat to that, that we could make a different type of product. If you’re familiar CBD or hemp derived CBD only products, those could be sold across state lines, but we don’t have that product line going yet.

Jennifer: Okay. Again, for folks listening, so this is the same as Washington. If you’re in a state that doesn’t allow this, this is kind of akin to certain states, you used to have to go into a liquor stores to buy liquor. You couldn’t just buy it at Safeway or at Albertson’s. It’s the same concept as you have to go into one of these establishments. Then, the question that I was trying to get to was, how did you train the salespeople at those locations to be able to educate these newcomers about your product, and your product’s benefits?

Wayne: Yeah, yeah. It’s a really good question. It’s a really hard one to figure out right now, which we’re constantly working on, and how do we get better at that. There is such a disconnect from, like, we don’t engage with the customer directly. There’s always a store or someone in the middle. What we realized early on was, that the bud tenders, the people serving customers, they’re in such an interesting position. It’s like part bartender, but part pharmacist in a way. You could have someone coming in and be like, “I was diagnosed with cancer,” and you’re like, “Wow, this is really heavy conversation.” What we found out was, most customers and bud tenders are saying, customers are buying off of the bud tenders recommendation, almost 50 percent of the time or higher. It’s really high. What we saw was, we have to talk with, educate, have conversations with the bud tenders, directly communicate with them.

Wayne: Another thing about our brand is, because we focus on the science and the chemistry, that’s my background, so we kind of created the brand around that, we are normally a step a little further ahead in the science and our formulas. We’ll use things like terpene profile, which a lot of customers might not be familiar with yet, but it’s kind of catching on and becoming more mainstream. We really have to communicate that to the bud tenders. We started with bud tender education sessions.

Wayne: We would set up a morning appointment before they opened, get the whole staff together, and do a half hour presentation. We’d try to do that, one a week, and we’d go from store to store. Then we started, another huge one for us, has been the podcast that we started about a year ago. We do some science focused episodes on there. That’s been steadily growing, but it’s a lot of bud tenders are are listeners. We’ve actually had a couple of stores tell us that they pay their bud tenders, when they’re at home to listen to the science episodes as part of their training curriculum. A couple of stores have it playing in their waiting room, the podcast on in the background. The podcast has been a huge leap forward for us, and just so glad we started that. That’s been very very helpful. It’s a really hard one to answer.

Wayne: The cannabis is so new. There’s so many applications and different formulas, and all this new stuff we’re learning. As soon as you get the science figure out and maybe you’re packaging and branding lined up with that, there’s something else now, and we have to adapt. It’s just a constant tornado, I guess you’d describe it as.

Jennifer: Which I can imagine is both frustrating, but also really exhilarating and exciting, probably just depending on the day.

Wayne: Oh yeah, definitely. Yeah, yeah. There’s never a boring day.

Jennifer: Speaking of that, because it’s so new … when you started, what were some of the logistical and or potentially legal hurdles that you had to overcome? Are there any particularly memorable challenges that you faced and you were like, “Okay, we’re just going to figure your way through this one?”

Wayne: Yeah, the cannabis on paper, it’s really just like a food and beverage CBG product with a different ingredient, with just adding the cannabis. If you look at it on paper a a business model, if you’re making a food product or a beverage product, you can really … I mean there’s so many different forms of cannabis extracts and concentrates now, that you can add to pretty any product. You just add that in as another ingredient. You’ve got to get the dosing right. There’s lab testing, but you’re like, “Well, that’s not too complicated. With a little bit of chemistry or math skill, you can figure out the dosing,” but there’s so many things you don’t plan for, and most of it is just regulations around the state, and just the time and lag time it takes to either get a license, get a question answered, move forward, the labeling. You could have all these pre-printed packaging, then they decide they want to change a rule.

Wayne: Washington through something really crazy recently, where they almost banned all gummies from the market, just entirely. It’s like, that could be someone’s life line, you know. If they ban caramels, that’s all we make. That would be very bad. It’s those kind of things. It’s not so much running the internal operations. There’s your normal challenges with that. That’s no easy accomplishment either, but it’s much like the food and beverage industry. It’s just the regulatory landscape that gets tough.

Wayne: For us, one of the hardest things we faced in the beginning was going from that medical market to the recreational market, where we needed a full, built-out commercial kitchen. We needed the new license. There were all these new testing protocols, and hold times on inventory, and how you had to stage it and test it. Figuring all that out was very costly. We went through a period of about three months where we couldn’t produce of make product, and I had people on payroll still while we were getting our license during that transition period. I almost had to borrow money during that time, because I broke even in the medical market in five months, I think, pretty quickly on the money I invested, and then was turning a profit.

Wayne: When we went to the rec market, I started with around 60K. I think I was down to about five grand in cash and 20 thousand on credit cards. I had backup plans to borrow more money, because I had this thing that worked. I just had to get through the technicalities to get my license, and get the product back on the market. That was a really hard time. I had never raised money before, got investor money, so I was like, “I am going to have to do this now, to keep this business going?” I really didn’t want to. If I was going to do it to scale and grow, that would be one thing, but I’m doing it just so I can wait longer to get my license. That’s a really hard to borrow money when you’re sitting there, and you’re not getting really a lot of the value out of it.

Jennifer: Yeah, oh absolutely. Speaking of raising capital, are there … Can cannabis business now go to a bank. I remember for a long time there was a time where banks, federally backed banks would say they weren’t allowed to lend out, or are investors. Whether this is specific to you or what you’ve heard in the industry from other folks. Are certain investors leery of investing into this industry? Either because it’s cannabis, or just because it’s new.

Wayne: I think so. When the tech bubble happened early on, I think you’re going to see 90, 95 percent of businesses probably … it’s very risky in this market. We’re trying to do everything right and this isn’t a sure bet. There’s still a lot to go in inner state commerce or federal legalization’s a whole nother question that just throws the industry back up in another tornado. Most banking’s accessible. We have banking set up. We write check and everything. Most people have access to that, at least in Oregon. We can’t get a line of credit from the bank, no bank loans, it’s really only like angel money, private investor, BC money, and some companies now are going public on the Canadian stock exchange. They call it the reverse take over IPO. They’re not going public. They’re buying a shell company that was public. Then they have access to all these funds. There’s a lot of creative ways businesses are using.

Wayne: I think now, in our position if I needed to raise money or I wanted to go get more, I don’t think it would be that difficult to do, because we’re profitable. We have a business that’s working. For startups with an unproven concept, I mean, if you’ve got a good product, or a good team, or you’ve proven your success in the past, I think there’s still room. Oregon’s highly competitive right now and every new state that comes online is a huge opportunity for a new market. I think there’s definitely a lot more money out there now and coming in, and different ways you do it. It does seem like you have to be a little more creative and it’s not as clear cut or cookie cutter, you know kind of the standard ways of getting money used to be.

Jennifer: You had mentioned in the beginning that you had started with more products than just caramels, and now focus on the caramels, so … initially, kind of how big was product line and was the decision making to say, “Okay, we are just going to focus on this?”

Wayne: Yeah, so we actually only started with caramels. We didn’t have other product lines. That was just out of necessity. When you’re self financing, for the first six months, it was me making caramels, wrapping caramels, going out and selling caramels. It was one person, right? Out of necessity, I couldn’t make more than one product line, so my thought was like, “Okay, I need to make a product that works and then I can scale that, get a little bigger, hopefully become profitable, then we could add other product lines as an edible company.” Most edible companies have multiple, a chocolate, a gummy, a hard candy, actually very few make one specific product like we do.

Wayne: As we started to scale we said, “Okay, maybe that’s because one product isn’t enough to support a business or you need more than that.” As we scaled, I think there’s 600 stores in Oregon now, we’re in about 150, so we still have a ways to go to kind of saturate Oregon. Once we got to around 40 or 50 stores and our sell through rate in those stores was good, I think higher than the normal CPG product, we were like one, we’ve got to scale this to at least saturate Oregon, before we can even think about another product line, and just looking at the numbers that’s going to be a pretty big business that’s profitable. Why try to create another product line to make- I’m not interested in necessarily making more money.

Wayne: I’m fine with leaving money on the table, even though our brand is known and we could add a new edible. My goal really is to saturate Oregon with our product line of just caramels. Then create such a solid brand that we have extreme staying power. When big money comes in or Coca-Cola, or someone that makes these products at scale for cheap, how are we going to stick around? It’s really a complete focus on our brand. That’s why we’re doing the podcast and only one product line, so we’re known for that and hopefully there’s no confusion when it comes to caramels, we’re just the best one in Oregon, and if we’re in other states hopefully that’s the the case too.

Jennifer: I’m familiar here in Washington that the dispensaries carry a lot of gummies, a lot of the hard candies, but caramels is not something that I’ve seen a lot of. Is that the same in Oregon?

Wayne: Yeah, no, it is. I think like gummies or chocolate. There’s 10, 20 companies. There’s quite a few. In Oregon, I think we right now only have three or four other companies that make a caramel. I didn’t have any experience in food manufacturing or production. I had a background in chemistry, which allowed me- you know caramel is really a chemistry process; temperatures, hold times, getting those down to a T of small margins for error. I think what I kind of discovered is it’s a harder product to make. You don’t have as much room for error. It’s a harder product to scales versus maybe a gummy or a chocolate. It does seem like you see a lot, which it really wasn’t our plan at the beginning. We picked a caramel, because a friend had this artisan caramel recipe, we really liked it. There’s not really other strong caramel on the market right now, so let’s make that product. There’s much fewer caramels on the market and I think it’s a harder product to make, and definitely to scale as well.

Jennifer: It’s nice. It’s another way to help differentiate yourself though.

Wayne: Yeah, yeah definitely. Yep.

Jennifer: One of the things that food entrepreneurs do a lot to get their products into new consumers’ hands is sampling. Is that even something that’s allowed in the edibles industry or not? I’m like, I could see how that could go sideways pretty quickly.
Wayne: It is allowed. They keep changing the rules, actually. They just changed them now, so we can only give three samples per store, per 30 days. At first it was kind of open, so people were giving away a lot more samples. That’s still a really important way. With that high of a bud tender making a recommendation and a customer buying based off that, for them to have tried your product is really critical, just to have a presence in the store. We try consciously, we track how many samples we’re giving out, and when we can give out more, and try to consciously get every bud tender in that store to at least have gotten our product once and tried it. I think that’s huge.

Jennifer: Interesting. Kind of taking a little bit of a bigger picture, can you share this with, because we’ve been talking about the industry’s changing a lot, and what’s interesting is, looking at it from the food side, I’m seeing a lot more news articles and stuff about edibles within the food industry. I’m going to be really interested to see when and if edible companies are at some of the big food industry trade shows. What’s kind of the status of the market as whole in the U.S. right now? Even when you were talking about Canada, I was like, “Oh, well that’s a whole other kind of ball of wax right there.” What is the status of the edibles market as a whole. Also, to kind of run it out, what do you see the future, cause it sounds like it’s very open ended, which I imagine is frustrating and really exciting.

Wayne: Yeah. Yeah, it’s such a weird position to be in, because you have companies that are scaling pretty aggressively and changes can happen that just make maybe your Colorado operation irrelevant. If you can trade across state lines, why have an operation in Washington, Oregon, and California, if you could produce just in Oregon and sell to all three states. That could happen in two years, five years, twenty years, we don’t have any kind of reading on the federal landscape or when they might make a change. It definitely seems to be like a black box about cannabis and the federal government, and how they’re looking at it, or what they’re thinking. That makes it really hard. Aside from the federal level, it’s really hyper specific state by state.

Wayne: It depends on, is it just a medical program or is it a recreational program? How restrictive is it? What is the license cost in that state? Is there a cap on licenses? Do they only allow 50 licenses to very few players? The other thing I’ve noticed in Oregon and Colorado, because I spent some time in Colorado trying to learn about their market. They were the first to go recreational, so they’re the furthest ahead of any state. I think you can learn a lot from these states and Oregon, I think now is showing some other states a lot of how a program can evolve and what it might look like. What I’ve kind of figure out, I think, is if you’re going to go into a new state, like if we were going to expand into Colorado, I think we could do that right now, and have a really good chance of having a business there.

Wayne: If you’re going to start, I would be on the shelf or started when the new program gets launched, the new rec program, so you’re the first one there, those new customers are seeing you. Within those first zero to six months, if you can’t be that early, the first 12 to 24 months is really chaotic and hard to get traction in the market. The stores have been filled. Now, if they want to put you on the shelf, they have to take somebody else off. Customers are starting to kind of get their brand loyalty and the products they like down. If you’re going to come into a market that’s already legalized, I think three to four years after it legalized, it seems like Colorado is much more stable now.

Wayne: One of the questions that I always ask when I go in is like, “How many new products or new companies are coming here asking you to try their products or let you on their shelf?” Colorado, it was like the first year to two years, it was like two companies a day, every day, just high volume, or more. Now, four or five years later, it’s like one or two a month, a new company will show up. We’ve got our established brands, it’s running smooth. There’s a lot les kind of chaos in that market once it’s matured a little bit. The big question is, Colorado, okay it’s matured, the players are there, companies are profitable, doing well, what happens when federal legalization happens, or if an Oregon company can ship their product to Colorado and compete there? The whole thing just starts over again. You really have to reevaluate your business model, because it’s all going to change.

Jennifer: It just sounds like such an interesting time to be in the industry.
Wayne: Yeah, it’s still the wild wild west, with a little bit of stability finally occurring.

Jennifer: Well, Wayne, thank you so much for sharing your experiences with us today. Again, there were so many things as you were talking that’s like, “yes, this pertains to every food and beverage entrepreneur regardless of their product category.” Then it was just so interesting to hear some of your experiences in an industry that is newer, especially that is growing within the food industry as a whole. It will be really interesting to continue to watch your growth and to see what happens in the industry.

Wayne: Yeah, yeah. Thank you for having me on. One more thing I’ll say for listeners, if they have a small food business or making a beverage. The hemp CBD market is really interesting, because it’s much less unregulated … it’s regulated, but the barrier to entry’s much much lower. They just passed the farm bill, so hemp cultivation and processing, which CBD, if listeners don’t know is a cannabinoid you get from the cannabis plant. The THC cannabinoid is the one that it has a psychoactive effects.
Wayne: The CBD is really more therapeutic, anti-inflammatory, but doesn’t have the kind of mental, getting high that people think of with cannabis products. That market’s really going to open up and allow people to sell CBD products off their website, ship across state lines. We’re in the middle of that. We see companies already doing it. We could go sell our caramels to all the Portland coffee shops and have it right next to the checkout with a CBD product and not be highly restricted in just the licensed stores for THC products. That’s a whole new market segment that could open up if a company’s got a good product, but they’re struggling to get traction, if you do a CBD line, it might really be an avenue to open up a new channel for your business.

Jennifer: Can I ask you with that, where would … if somebody’s listening, do you have any resources like to tell somebody, “Hey, check out my podcast. That will give you more information.” Is there someplace that we can point folks to?

Wayne: I think the podcast is a good place to go to if you’re interested in cannabis at all. We basically do two types of episodes. We either do science episode and we’ll get a researcher on or PhD. We had a neuroscientist on a few weeks ago and really talk about how cannabis works, the cannabinoids, the secondary molecules. There are other episode is business focused, so basically a business owner will tell their story, how they started the business, how they grew it, scale it, where they’re at right now, and we’ve done a couple with CBD specific only companies. I think those stories and those episodes would be really helpful to just start getting an idea of what the CBD market is going to kind of look like and how it will evolve.

Jennifer: Excellent. The name of the podcast is “Periodic Effects,” is that right?
Wayne: Yep, periodiceffects.com. Periodic Effects on every podcast app there is. We have our own app in the app store on your phone, listen from the website. There’s a lot of different ways to get it, yep.

Jennifer: Great. Also, for those listening, if you want to check the smallfoodbiz.com website, I’ll include a link from the transcript that will accompany this podcast as well.

Wayne: Sounds good.

Jennifer: Well, Wayne, thank you again. I really appreciate it.

Wayne: Yep. Thanks Jennifer. It was really good talking to you.

Jennifer: Thanks, bye.

Wayne: Bye.

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