Weedmaps CEO: Our marketing is about 'Breaking Down Barriers'

Weedmaps CEO Chris Beals joins Yahoo Finance to discuss how the marijuana company grows its business and gains more users through innovative marketing.

Video transcript

- We want to concentrate on an industry group that has actually had a pretty bumper week for the most part, and that's the cannabis industry. And that comes after Republicans are advancing legislation there to finally pave the way for federal regulation and access to banks, and all that would bring.

And we want to talk to one company today, the CEO of Weedmaps Chris Beals. And you just released your earnings and your stock is taking a bit of a stumble today, down about 20% to, I believe, a record low, and it has to do with your guidance. And let me just put this out here, for third quarter you were looking at-- excuse me, for the fourth quarter you were expecting revenue of 50 to 52 million, the estimate was for 59.4 million.

But you said something really key that I focused in on the call yesterday. You said, "Consumer demand shift to non-licensed operators has a direct impact on our business client base, a number of our clients struggled during the quarter." Now, when you say non-licensed, we're talking about illegal, we're talking about off the books here, maybe a criminal element. Is that the case? That you're losing market share to them?

CHRIS BEALS: Yeah. I think it's an interesting story. I think strangely our value proposition is most underscored during times where margins are tightening for retailers. We have the most cost effective way for retailers to reach and engage and get conversion on consumers with our Weedmaps marketplace on the B2B side.

The efficiency that that drives in terms of cost savings, labor reduction, to sort of maintain compliance or run operations, it all fits very nicely with sort of the needs of businesses. However, what we saw is a really interesting thing. I think a number of suppliers were really expecting the number of licenses this year to be higher than they actually were.

The end result of that was is you had this sort of supply glut that I think is very temporal in nature but in some cases, that product was moving from the licensed market into the illicit market. And so, you saw licensed operators competing with unlicensed operators who often were providing product that was of similar quality.

And while we expect that to ameliorate with increases in licensing that we'll expect to see next year, but then also behavioral shifts as retailers who are licensed learn to better educate consumers on the benefits of going to licensed outlets and that sort of thing.

- Well, and that's kind of the key because it looks like we are going to get that federal legislation. And then you've got to think that all the hatches are going to be down, that there's going to be a big regulatory drive, and that a lot of the illegal players are just going to be kind of forced out of the system.

Not too many people selling illegal cigarettes, although that does exist as an example. I'm just wondering how long does all of this take? I mean, let's say we get a Bill and it's passed, then how long after that do we see this transformation take place?

CHRIS BEALS: Frankly, it can happen well in advance of federal legalization. Almost every cannabis market in the US is under penetrated in terms of licenses, and usually when those licenses are issued, the licenses are pulling operators out of the illicit market and getting them licensed and bringing them into the illegal market.

And so, really, I think what changes this doesn't really rest so much on the federal level as much as it just rests on state and local governments continuing with the pace of licensing and continue to move forward. And I think the reality is that COVID really impacted this. You had state and local governments meeting at a lower cadence, really focusing on pressing public health issues.

That being said, I think we're preparing for continued acceleration in the market. We closed three acquisitions this quarter, our growth in the US this last quarter was 8% quarter over quarter, 46% year over year.

And so we saw growth across all of in markets even as retailers and individual markets, I think, saw some moderation in the consumer demand they were seeing. But if you look at something like the city of Los Angeles, they're expected to issue several times more licenses in the coming quarters than they currently have right now.

- Well, let's talk about your product then and how you integrate. As I understand, you're kind of a bridge between consumers and producers, distributors, and everybody else in between. And there are all kinds of legal hurdles to be cleared and compliance issues.

I guess we've seen this trend in a number of industries where things are consolidated and made easy vis a vis technology, disruptive technology but how are you applying this to the cannabis industry?

CHRIS BEALS: Yeah. So, the business is really split into halves. On the marketplace side I think one way to think of this was sort of a GoodRx meets DoorDash. How do you give consumers the information they need? What's for sale? How do you get them to understand cannabis products? And then how do you show them retailers and brands and then let them be able to place orders with those folks? That's really where we come in on the marketplace side.

And within that, when you look at the return on ad spend that we provide and that sort of thing, we're also the most cost effective way for these retailers and brands to reach more consumers, to increase traffic to the store, whether it's through online channels or offline in-store channels.

We pair that with, and this is a really key component in an industry that's as heavily regulated as this, with what I believe is the broadest suite of sort of B2B software running across e-commerce to power ecom on the business's website. Things like, we acquired Sprout which is a CRM and loyalty solution this quarter, delivery logistics and fleet management software, especially important in an industry where you often have to GPS track drivers to maintain compliance.

And sort of the list goes on from their point of sale, that sort of thing. And we bring this all together into sort of an integrated suite that can help these businesses, whether they be the large sort of enterprise operators or what is generally the largest segment, which is the SMB portion of the Retail and brand market, be able to run their operations in an efficient manner. And more importantly, in a cost effective manner, especially when you see these margins start to compress.

- You know, the business of business is always fascinating but when you say something like the DoorDash of weed, I think ears are going to perk up from that. I want to talk about some of the partnerships that you have, one with Kevin Durant that was announced in August. Just in general, how are you marketing your product and are you finding any obstacles because of the regulatory, maybe at the federal environment in the US? Does that still affect your marketing plans here?

CHRIS BEALS: When you look at something like the Kevin Durant partnership, a really great example of us breaking down barriers, doing something with-- he maybe the leading basketball player right now, and really I think opening dialogues, opening conversations up.

I think when you have the size and sort of platform that we do, I think we're able to do a lot on the marketing side that just simply isn't available to most cannabis companies. That needs to change and hopefully it will change, and that's something we're advocating for but we also are doing other things.

We recently announced that with Berner, who is the founder of Cookies, which is one of the largest cannabis brands in the United States. We're partnering with him to develop sort of a social app to deal with some of the restrictions we're seeing across traditional social sites which make it hard for consumers to sort of engage with one another and build community, but also for retailers and brands to reach consumers.

And so some of it is we take the existing channels that are there and then in other cases I think we're really breaking down doors to create new channels.

- And we have time for one more here. I've noticed that you've made a lot of acquisitions recently. I'm looking at a company called Sprout, it looks like you say it's an all in one CRM and targeted messaging solution but also conveyor, concurrent. Is this part of your strategy now where you're really absorbing a lot of the key players in order to build your infrastructure? The way you manage your business?

CHRIS BEALS: Well, I think this is the really great thing about this quarter. I mean, we came out of going public, we're a profitable company, we have a war chest of cash that we can deploy. And more than that, we have a really sophisticated technology platform that's a great place for sort of smaller technology players to come in and get scale quickly, to avail themselves of other parts of the platform.

And so when we look at the buy versus build analysis, we're building a lot in-house but that's what makes such a great platform. Where we can go out and find attractive partners to acquire and bring in, we're doing so. If you look at something like concurrent, that's sort of an integrations and connectors software.

Sort of think of Zapier for cannabis, which is really critical when you think about all these disparate solutions between ERP, cannabis specific POS. Including the parts of our software stack where you want to be able to get them to cleanly integrate as a retailer or as a brand.

And so it's a bit of both but we were coming out of this quarter with a big war chest, three great acquisitions. And we had a great quarter in terms of hiring, in terms of bringing in a whole college of we have really smart and brilliant folks across engineering revenue operations.

- Well, we appreciate you stopping by and sharing all of that. Chris Beals, Weedmaps' CEO.