MARTHA STEWART CANNABIS: OVERCOMING OBSTACLEsl Professor Matthew Wilson wrote this case solely to provide material for class discussion. The author does not intend to illustrate either effective or ineffective handling of a managerial situation. The author may have disguised certain names and other identi/ing information to protect confidentiality. This publication may not be transmitted, photocopied, digitized, or otherwise reproduced in any form or by any means without the permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact lvey Publishing, lvey Business School, Western University, London, Ontario, Canada, N66 0N1; (t) 519. 661.3208; (e) cases@ivey.ca; wwwiveycasescom. Our goal is to publish materials of the highest quality; submit any errata to pubiishcases@ivey. ca. Copyright 2021, ivey Business School Foundation Version: 2021-09-01 After decades of prohibition, and despite cannabis still being illegal at the federal level, a legal recreational and medical cannabis industry was developing rapidly in the United States in 20202. In September of that year, one of Canada's largest cannabis companies, Canopy Growth Corporation (Canopy Growth), announced a partnership with Martha Stewart, revealing a range of cannabisinlsed products intended for the emerging legal US cannabis market. Was this partnership poised for success? CANNABIS Cannabis was the scientic name for the plant genus that produced marijuana, which was known for causing a \"high\" in people who consumed it.3 The main compounds in marijuana were delta9tetrahydrocannabinol (commonly referred to as THC) and cannabidiol (commonly referred to as CBD). THC was the chief psychoactive compound in the plant and caused the high users experienced.4 In contrast, CBD was known to cause drowsiness, helping people to both fall asleep and stay asleep and reducing anxiety.5 The plant had a long history of medicinal use; th earliest recorded use of marijuana dated back to 2727 BC, when Chinese Emperor Shen Nung used the plant for medical purposes and included it in an encyclopedia of drugs.6 In addition to having a range of medical uses, marijuana was used by many as a recreational drug. Recreational users of marijuana were motivated by a variety of reasons: some used marijuana in order to relax, while others used the drug in order to concentrate; some users consumed the drug in order to \"tune in\" to various activities, while others consumed the drug in order to \"tune out.\"7 The History of Cannabis in the United States Medicinal and recreational use of cannabis in the United States was complicated by a history of prohibition dating back to the 1930s. In 1932, Franklin Roosevelt was elected as the 32nd president of the United States, in part due to a promise to end the prohibition on alcohol, which he did in 1933. At the same time, the commissioner of the Federal Bureau of Narcotics, Harry Anslinger, began using mass media to disseminate antimarijuana propaganda, including hns nanced by major alcohol distilleries, which were concerned about revenue losses due to cannabis sales.8 In addition, in the early 1930s, the United States saw an increase in Mexican immigration, which the government attempted to combat in part by associating these immigrants with marijuanaand marijuana with violence, crime, and deviant behaviours.9 The 1936 lm Tell Your EXHIBIT 1: PERCENTAGE OF US CITIZENS IN FAVOUR OF LEGALIZATION OF MARIJUANA 1 00 90 80 7O 60 50 40 o 1969 1973 1980 1985 1990 30 2 mun 0 1995 2000 2005 2010 2015 2020 Source: Megan Brenan, \"Support for Legal Marijuana Inches Up to New High of 68%," Gallup News Service. November 9, 2020, https:llnews.gallup.com/polIISZ35BZ/support-legal-marijuana-inches-newhigh.aspx. EXHIBIT 2: BENEFITS AND RISKS OF LEGALIZING MARIJUANA Potential Benefits of Legal Cannabis Potential Risks of Legal Cannabis Savings from reduced spending on enforcing existing cannabis regulations- Employment opportunities in the cannabis industry; associated benets to economy Ease of access for medical use of cannabis Reduced negative social and economic impacts on marginalized communities that currently face disproportionate penalties for cannabis use Decreased drug-related violence Decreased health care costs (e.g., costs of painkillers) resulting from use of medicinal cannabis Tax revenue, both federal and state Costs of enforcing new cannabis regulations Productivity loss in workplaces due to inappropriate cannabis use Physical and mental health issues Public safety risks due to inappropriate cannabis use (e.g., driving while high) Increase in use of other drugs Source: Information summarized from Casey Camors, Stacy L, Chavez, and Andrea M, Romi, \"The Cannabis Industry within the USA: The Inuence of Gender on Cannabis Policy and Sales," Sustainability Accounting, Management and Policy Journal 11, no. 6 (2020): 109571126. EXHIBIT 3: CANOPY GROWTHSELECTED FINANCIAL INFORMATION Recreational Segment Dry Bud Oils, Soft Gels, and Other Cannabis Products Returns and Adjustments Medical Segment Dry Bud Oils, Soft Gels, and Other Cannabis Products Other Revenue Total Revenue 2020 $238,099 $22,699 ($51 ,500) $35,863 $88,964 $105,501 $439,626 2019 $82,643 $57,889 $51,390 $27,460 $34,049 $253,431 2018 NA NA $58,699 $15,650 $3,599 $77,948 Note: NA = not available Source: Compiled by case authors based on data from Canopy Growth Corporation, \"Investors," Canopy Growth, accessed Febmary 9, 2021, https:Ilwww.canopygromhcomnvestorsL Children (more commonly known by the name Reefer Madness) told a dramatic story of the negative consequences encountered by high school students who tried marijuana. These consequences ranged from hallucinations and traffic accidents to suicide, attempted assault, and a descent into madness The film was credited with fostering signicant public sentiment against marijuana.\" The Marihuamz Tax Act of 1937 effectively criminalized the substance.\" In the decades that followed, propagandized information continued to be disseminated by the United States government as part of its \"war on drugs.\"'2 In 1970, cannabis was classied as a narcotic drug and made illegal at the federal level.13 Specically, it was classified by the Drug Enforcement Administration (DEA) as a Schedule I dmg, which indicated that it~along with heroin, LSD, and ecstasyiwas one of the most dangerous drugs and had \"no currently accepted medical use and a high potential for abuse,\"M This law was implemented despite thousands of years of known medical uses of the plant.\" Despite its classification as a narcotic, marijuana became highly popular as a recreational drug throughout the 1960s and 1970s, bolstered by music festivals such as Woodstock and by the hippie and psychedelic movements of that era,16 Recreational users of marijuana were members of their own subculture and were oen referred to by stigmatized terms such as pot heads or staners.\" Despite being illegal, marijuana made its way into popular culture in many ways. For example, over the years, a number of films depicted marijuana enthusiasts; these included the 1978 film Up In Smoke, with Cheech Marin and Tommy Chong; Richard Linklater's 1993 lm Dazed and Confused; and 2008's Pineapple Express, starring Seth Rogen and James Franco, In addition, marijuana was oen referred to in music; Bob Dylan's music, for example, frequently referred to marijuana, including in lyrics such as \"Everybody must get stoned," from the song \"Rainy Day Women #12 and 35.\" Similarly, many celebrities were known to consume cannabis on a regular basis, going so far as to post images of themselves smoking the substance on various social media sites, By the mid-2010s, marijuana was the mostused illicit substance in the world, and it was estimated that, every day in the United States, 6,600 individuals began to use marijuana.'8 By 2014, for the first time ever, marijuana use overtook cigarette use among university undergraduate students: students smoked more marijuana on a regrlar basis than they did cigarettes.'9 The overall trend in the United States had been towards favouring legalization of the substance, with nearly 70 per cent favouring legalization as of 2020 (see Exhibit 1). In addition, and despite many potential benefits, the legalization of cannabis came with many potential concerns (see Exhibit 2), However, in 2012, Colorado and Washington became the first states to legalize recreational marijuana; by 2020, even though it was still illegal at the federal level, 15 states had voted to legalize recreational marijuana and 36 states had voted to legalize medical marijuana.20 In 2020, those people most likely to be opposed to legalization identified as Republicans or weekly churchgoers; among these groups, only 48 per cent were in favour of legalization.\" In addition, younger individuals tended to be more in favour of legalization than older individuals; for instance, only 58 per cent of people aged 55 and older were in favour of legalization compared to 68 per cent of people aged 35754 and 82 per cent of people aged 18734.22 Despite trends towards acceptance, the long history of marijuana prohibition and opposition had lingering effects; for instance, most marijuana users remained guarded about their use, which was attributed to years of stigma associated with the use of the drug,23 Medicalization and legalization had reduced this stigma, but social perceptions about cannabis use remained a concern. In addition, the stigma regarding marijuana use was applied differently depending on demographic factors such as race, gender, and social class. Oen, less-privileged individuals faced a disproportionate level of stigma and, as a result, took stronger measures to conceal their use of the substance,\" CANOPY GROWTH As public sentiment and policy trended towards tolerance, acceptance, and legalization of cannabis products, entrants into the legal cannabis industry emerged. These new entrants faced a myriad of challenges, not the least of which was opposing state- and federal-level regulations: companies could operate legally within a state that had passed legislation to legalize cannabis while simultaneously risking serious consequences such as closure of the business or incarceration of employeesiom federal authorities. One entrant into the cannabis industry in the United States was Canopy Growth Corporation, a Canadian cannabinoid company based in Smiths Falls, Ontario, that was \"driven by a passion to improve lives, end prohibition, and strengthen communities by unleashing the full potential of cannabis?\" The company had operations in 14 countries and more than 3,500 employees; in the United States, it operated as a federally legal hemp companyz'S (see Exhibit 3 for selected nancial information), Canopy Growth sold many types of cannabis products, including dried buds of the marijuana plant, so gel cannabis capsules, cannabis oils, cannabis-infused edibles, and cannabis-infused topical lotions. Although marijuana had traditionally been consumed by smoking the dried buds or leaves, modern uses oen involved consuming cannabis in one of the ingestible formats (eg, soft gels, oils, or cannabis-infused food or beverages).17 The so gel format allowed for the most precise dosing of GED or THC, which was a benet for medicinal use. In the United States, the company managed a house of brands including the following:2E BioSteel Sports Nutrition Inc., which produced sports nutrition products Canopy Animal Health, which produced CBD-based health products for pets First & Free, which produced CBD-based so gels and oil drops for personal use Storz & Bickel GmbH, which designed and manufactured ower-based Vaporizers This Works, which provided CBDbased skincare and sleep products Tweed Inc., which cultivated cannabis where it was legal to do so in the United States Canopy Growth was able to operate legally in any state where cannabis was legal. At the federal level, Canopy Growth operated as a hemp company; hemp referred to cannabis strains that contained less than 0.3 per cent THC.29 The 2018 farm bill (the Agriculture Improvement Act of 2018) made it legal to grow and sell hemp-derived CBD products and allowed the company to bypass the current federal prohibition.30 In January 2021, Canopy Growth's chief executive ofcer (CEO), David Klein, said he expected to be able to operate as a legal cannabis company in the United States within a yearnoting that he believed favourable changes to banking rules (which prohibited banks from facilitating the sale of illegal drugs) and a reclassification of cannabis as a legal substance could happen within six to eight months,31 THE MARTHA STEWART AND CANOPY GROWTH PARTNERSHIP The partnership between Martha Stewart and Canopy Growth began in 2019, when they developed a line of CBD products for pets. At the time, Canopy Growth co-CEO Bruce Linton commented on the strength Stewart's name added to the product, saying, \"As soon as you hear the name Martha, you know exactly who we're talking about. . . . Martha is one of a kind and 1 am so excited to be able to work alongside this icon to sharpen our CBD product offerings across categories from human to animal,\"32 Martha Stewart had indeed cultivated a well-known lifestyle brand, beginning with her 1982 publication book Entertaining, which included chapter titles such as \"Cocktails and Hots d'Oeuvres,\" \"The Crudit and Cheese Party,\" and "The Omelette Party."33 In the decades that followed, she further developed her through her magazine, called Martha Stewart Living, as well as through various ventures in tele merchandising, ecommerce, and other areas. Her magazine and personal brand focused on topics relr domestic life, such as recipes, arts and crafts, home decor, party planning, and gardening.\" The New York Times referred to her magazine as \"the monthly homemaking bible,\"35 and she had been referred to as both \"the epitome of normative white suburban consumer culture"36 and \"America's principal domestic doyenne."37 The Martha Stewart brand's mission was \"to teach and inspire people of all ages to make their homes and lives more beautiful, more functional, and more meaningful by offering superior function and innovation, high-quality products at a value, [and] beautiful design that elevates the home.\"8 Research revealed that Stewart and her brand played three main roles in the lives of her fans: they allowed them to enjoy the fantasy of elegance, luxury, and escape from everyday lives; they validated interests in domestic work by making domestic work seem respectable; and they fostered a sense of creativity, accomplishment, and pride.39 Over the years, Stewart amassed an extensive fan base of individuals who were thought to be big spenders and who were 10 per cent more likely than average Americans to inuence the purchasing of others.\" There were roughly 7 million readers of the print or digital edition of Martha Stewart Living; these readers were primarily female (89 per cent); their median age was 56 years old; and they had a median household income of US$77,7S4,\"l with nearly 40 per cent having household incomes over $100,000,\"2 Most had attended college or university (68 per cent), owned their own homes (71 per cent), and were married (57 per cent)\" In addition, over 80 per cent were the principal shoppers for their households, and they collectively spent approximately $85 billion a year on purchases of home-, health-, auto-, and vacation-related goods and services.M Each month, the Martha Stewart Living website had approximately 11.2 million users and 57 million viewers.45 Martha Stewart CBD Upon the launch of her CBD products, Stewart revealed that her decision to create a line of CBD products was based on personal experience, saying, \"I've found that CBD supplements are a simple way to enhance my own health and wellness, especially when it comes to managing the stresses of daily life.\"46 She also noted that the timing of the launchlate 2020was ideal, saying, It's such an opportune time now [for Martha Stewart CBD] because of the hon'ible stresses that all of us have been under since March when our quarantine during this pandemic started. . . . We're all feeling stressed, we're all feeling cooped up, we're all feeling like, \"what the heck is happening?!\" So this is a good time for a launch of products like this that can actually help relieve stress and promote a feeling of well-being without drugging you out."7 Stewart credits the American rapper Snoop Dogg with introducing her to the benets of cannabis, saying that she experienced a pleasant high after sitting next to Snoop Dog for seven hours during the lming of Comedy Central's 2015 \"Roast of Justin Bieber.\" Stewart remarked, \"We sat next to each other for seven hours. Snoop must have smoked 10 giant fat blunts, and I inhaled all that smoke, I felt really good.\"AK Martha Stewart CBD products were edible and included wellness gummies, soft gels, and oil drops, all of which were designed according to her \"exacting standards\" for quality and safety and branded with her name.49 The wellness gummies each contained 10 milligrams (mg) of CBD isolate and came in a wide range of avours, including Meyer lemon, kumquat, blood orange, huckleberry, and black currant; these retailed for $34.99 for a container of 30 gurnmies or $64.99 for a box of 60 gumrnies.50 Both the Martha Stewart sot gels and the oil drops retailed for $44.99.\" The soft gels were avourless and sold in bottles of 30 so gels, which contained 25 mg of CBD isolate each, while the oil drops were sold in 750 rnillilitre (ml) bottles, which contained 25 mg of CBD isolate per 1 ml dropper and could be purchased in a avourless version or in two avour options: Meyer lemon or blood oranges2 Stewart revealed that she used the oil drops daily, saying, \"The thing that really helps me are the oil drops that I have at night, before bed. . . . I just put a couple droppers of the blood orange or Meyer lemon under my tongue,\"53 Stewart described her CBD products as delicious, saying, I set out to create the most delicious CBD products on the market, drawing inspiration from some of my favorite recipes and avor proles from my greenhouse and gardens. My wellness gumrnies closely resemble the French confections, pate de fruits, rather than the sticky, overly sweet versions you might nd elsewhere, Created in collaboration with top researchers and scientists at Canopy Growth, 1 am very proud of the end result: wellness gurnmies, oil drops, and soft gels that taste as wonderful as they make you feel.54 Stewart revealed that the target market for her CBD products was \"pretty much everybody,\" including people her age (79).55 Consumers could purchase Martha Stewart CBD products in nearly 600 locations of The Vitamin Shoppe across the United States as well as online at vitaminshoppecom, marthastewartcbdcom,\" or shopcaonpycom?7 Sharon Leite, CEO of The Vitamin Shoppe, said of the partnership, \"Martha herself was in the first pitch meeting, by video, and she talked about her signature avour inspirations, I knew she would bring something special to this category. . . . Quality and expertise are two of our xations, and Martha brings that to everything she does exceptionally well. We're also committed to innovation, and the Canopy team delivered with this uniquely trusted brand and flavor-forward CBD formulations?\" On Canopy Growth's partnership with The Vitamin Shoppe, Klein said, \"The Vitamin Shoppe is one of the nation's most recognized and trusted names when it comes to supplement retailers with convenient locations all over the country.\"59 NEXT STEPS The partnership between Canopy Growth and Martha Stewart had a lot of promise; however, the future of the legal cannabis industry in the United States remained uncertain. How would consumers respond to the Martha Stewart CBD offerings? What obstacles would Canopy Growth and Martha Stewart have to overcome in order to achieve success? What market segment(s) were the most attractive to Canopy Growth, and which products should be prioritized