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COWEN
COLLABORATIVE INSIGHTS
February 25, 2019

Cannabidiol (CBD) Entrance Into Mass Retail May Start In Beauty Before Entering Broadlines (Chen)

Cowen's take is that first movers may predominantly consist of independent operators, followed by beauty, convenience, and other major chains. We believe that growth could take on a barbell dynamic, with early adopters being both high-end luxury players alongside lower-end local convenience shops, with middle-ground retailers including WMT, TGT, and COST likely being the last to sell CBD products after a test-and-learn phase is observed among the early adopters. We expect that CBD in beauty could be a ~$1bn opportunity within skincare specifically; the skincare category currently comprises ~23% of the overall $87bn beauty products market.

Luxury Department Stores Are Early Adopters. A number of independent retail operators have recently announced plans to expand their physical presence to incorporate CBD. For example, luxury department store Barneys New York is adding a 300-square-foot cannabis store-within-store concept called "The High End" to its flagship store in Beverly Hills, where it will sell CBD beauty products and vintage paraphernalia. Neiman Marcus also announced its "Trending Beauty" initiative, which includes carrying leading CBD brands (5 SKUs) online and within 5 of its 44 stores.

Another example is Green Growth Brands (CSE: GGB, not covered) recently announcing a deal with DSW Inc. (DSW, not covered) to sell its Seventh Sense brand within 96 US-based DSW stores; this announcement comes after a 10-week trial phase where 74.4% of product presented on shelves was reportedly sold. GGB also announced it will open 108 stores within Simon Property malls (SPG, not covered), starting in March 2019.

Beauty Could Be First Major Distribution Channel. Cowen believes that the future of beauty will increasingly emphasize clean, natural ingredients within products – in line with the broader health and wellness movement that is permeating into various other retail verticals. Therefore, we believe that beauty could be the first major distribution channel to adopt CBD given the compound's properties as a natural remedy to manage pain, inflammation, and anxiety.

Sephora.com currently carries 3 SKUs with CBD dosages (Lord Jones and Josie Maran), and a variety of hemp-based products. Meanwhile, ULTA only has hemp-based offerings but could adopt a comparable line to Sephora within its Prestige assortment. Average Unit Retail (AUR) for the three Sephora CBD SKUs is ~$70, or $1.85/mL, which supports our view that adopters will skew toward Prestige-cosmetics-oriented retailers such as specialty beauty players (Sephora, ULTA) and department stores (JWN, M), before Mass cosmetics carriers like grocery stores, pharmacies or broadline retailers adopt it, as price points are closer to $10/SKU.

Historically, broadline retailers, including WMT, TGT, and COST have shied away from entering controversial categories in their earlier innings, preferring to be last movers and not create controversies. We do note, TGT has previously made small inroads into CBD. According to AdAge, TGT briefly sold hemp and CBD oils in late 2017 before pulling all the products. Also, we note, WMT's website does sell several hemp oil products.

[Vertical text on right sidebar]: This report is intended for michael.cella@cowen.com. Unauthorized redistribution of this report is prohibited.

Figure 114 CBD Presence Is Limited In Mass Retail Outlets

[Table]
Broadline: WMT | TGT | COST
Beauty: ULTA | Sephora (LVMH)
Pharmacy/Mass: CVS | WBA

Carry CBD Products:
WMT: x | TGT: x | COST: x | ULTA: x | Sephora (LVMH): ✓ | CVS: x | WBA: x

Carry Hemp Seed Products:
WMT: ✓ | TGT: x | COST: x | ULTA: ✓ | Sephora (LVMH): ✓ | CVS: ✓ | WBA: x

CBD SKU Count:
WMT: n/a | TGT: n/a | COST: n/a | ULTA: n/a | Sephora (LVMH): 3 | CVS: n/a | WBA: n/a

Note: CVS and WBA are covered by Charles Rhyee
Source: Cowen and Company, company websites; Note: Search "CBD oil, CBD, Cannabis, Cannabis Oil"

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