Subscription Boxes: The Challenges Presented by Cannabidiol (CBD)-Based Products
Though the subscription box space is becoming increasingly crowded in traditional product categories (food, beauty, apparel, lifestyle, and pets), the legal ambiguity, among other things, associated with Cannabidiol (CBD) has so far limited the number of CBD-based entrants to only about a handful as of May 2019. Such a large and addressable market will certainly not remain untapped for long; however, there are a number of issues with which prospective subscription box sellers, pure-play or otherwise, should be intimately acquainted before embarking on the subscription-based green rush:
The legal status of CBD-based products
The challenges inherent to sourcing CBD-based products
The efficacy of CBD-based products
Restrictions on advertising and selling CBD-based products
Merchant services for CBD-based products
Order fulfillment and shipping challenges of CBD-based products
As the CBD market continues to evolve in the coming months, many of these issues may very well disappear; however, at present, they dominate the landscape.
More so than any other category at the moment, CBD-based products present an array of challenges. In this section, six are outlined in some depth: questionable legality, sourcing difficulties, efficacy concerns, marketing and selling restrictions, merchant services limitations, and order fulfillment complexities.
The Legal Status of CBD-Based Products
Contrary to conventional wisdom, the legal status of CBD remains murky. It is true that the Agricultural Improvement Act of 2018 established a definitive line of demarcation between different strains of Cannabis sativa L which legalized all parts—from seeds to extracts, acids, salts, and isomers – of those strains which contain less than 0.3% of delta-9-tetrahydrocannabinol (THC); however, the most common applications for CBD are in products—food, beverages, and supplements—regulated by the Food and Drug Administration (FDA). At present, the FDA has yet to establish a regulatory framework for CBD (though initial steps are being made) and the official position of the agency is that until such time as it gives the green light, the sale of CBD-based products falling under its jurisdiction, regardless of whether or not they are derived from now-legalized strands of Cannabis sativa L, violates the Food, Drug, and Cosmetic Act of 1938.
The Challenges Inherent to Sourcing CBD-Based Products
For those sellers entering (or thinking about entering) the CBD space, sourcing decisions must be made with great care. Though the Farm Bill has laid the initial groundwork for legitimization, CBD can be extracted from the cross-section of strains of Cannabis sativa L—including those still scheduled due to THC levels. CBD extracted from illegal strains is absolutely not made legal by the Farm Bill or any other federal legislation for that matter. Accordingly, sellers must be certain that they are being supplied by licensed cultivators with CBD derived only from industrial hemp. Failure to do so puts at risk not only the business, but also its clients who can easily end up (quite unknowingly) on the wrong side of the law. Further, it is incumbent upon sellers to ensure that suppliers are producing safe products that are free of heavy metals, pesticides, and/or other contaminants such as chemicals utilized in the CBD extraction and refinement processes.
The Efficacy of CBD-Based Products
CBD may have a substantial amount of therapeutic potential; however, as of the writing of this post, very little is definitively known about CBD and its efficacy. Given its status as an illegal substance over the past decades, scarce scientific research has been conducted regarding Cannabis sativa L and its many parts (CBD and THC are only two of more than one hundred cannabinoids). Of course, rigorous scientific and medical studies have found CBD to be an effective treatment for two forms of childhood epilepsy; however, the literature is otherwise sparse and many (if not most) claims of the therapeutic value of CBD remain fully unsubstantiated by legitimate studies.
Restrictions on Advertising and Selling CBD-Based Products
Due largely to the legal ambiguity, CBD-based products cannot currently be sold through traditional online channels. Google Ads, for instance, continues to list CBD as an unapproved pharmaceutical or supplement (which is in keeping with the FDA’s stance regarding most of its applications). Facebook also prohibits CBD advertisements on its platforms and even recently conducted a purge (since reversed) of CBD pages. Similarly, though you will find many listings for hemp-based products on Amazon (a channel representing nearly half of US e-commerce), you will not find any containing CBD as it remains strictly prohibited. Some major retailers, however, are beginning to warm up to CBD including Walmart, CVS, Walgreens, Neiman Marcus, and Sephora—all of whom have entered the space in recent months.
Merchant Services for CBD-Based Products
Merchant services can easily become a nightmare for e-commerce sellers doing everything by the book. Indeed, though unexpected holds, account freezes, and terminations seem to be an unavoidable part of the e-commerce experience, CBD only complicates things that much further given its unclear legal standing. At present, the overwhelming majority of processors will not handle payments for the sellers of CBD-based products. This list includes PayPal, Stripe, Shopify Payments, and just about all of the others—with the exception of a small group of high-risk processors which presently includes PaymentCloud, EasyPayDirect, and SMB Global.
Order Fulfillment and Shipping Challenges of CBD-Based Products
Many third-party order fulfillment providers are currently balking at the prospect of taking on CBD-based business due to the legal ambiguity surrounding it and the restrictions put in place by the carriers. The United States Postal Service (USPS), for instance, has recently outlined a number of conditions which must be met for CBD-based products to be shipped through its network—both of which create potential liability for not only CBD sellers, but also third-party order fulfillment providers. Notably, the cultivator of industrial hemp from which the CBD in question is derived must have a license granted by the Department of Agriculture for the state in which the accepting post office is located. Further, CBD-based products absolutely must not have THC levels which exceed the limit set by the Farm Bill (necessitating the inclusion of a Certificate of Analysis with each shipment to mitigate the risk of a trafficking offense). In terms of the main private carriers, FedEx still has CBD listed as a banned substance though UPS does not appear to have any restrictions in place at present.
The willingness of large retailers including CVS, Walgreens, Neiman Marcus, Sephora, Barney’s, DSW, and Unilever to enter the space in recent months suggests that conditions are shifting in favor of CBD sellers. Naturally, as the market continues to evolve, the untapped nature of the subscription box space makes it a logical target for near-term expansion. For some, the upside will likely prove substantial; however, the so-called green rush remains fraught with complexity, risk, and Knightian uncertainty.