Coffee, Competition and Separation Anxiety

In Seattle, the home of grunge fashion, Frasier Crane, the Starbucks Corporation headquarters, Initiative 502 and a pot surplus that has undermined the profitability of the stuff, some have spotted a new trend: THC-infused coffee.

Specifically, merchants such as Uncle Ike’s Pot Shop are now selling infused K-cups for $10 each, 10 mg of THC per single-cup serving

That amount, 10 mg of marijuana’s active ingredient, THC, is becoming a standard serving, though the manufacturer cautions that consumers are wise to “begin with partial dosage to become familiar with the product.”

This is in a sense a vindication of the lessons of any undergraduate microeconomics course. An attractive, newly legal product that serves a large pent-up demand generates early profits, but those profits become vulnerable as new entrants increase competitive pressure. One of the common responses of merchants when faced with such pressure is to differentiate themselves and their own offerings: thus, a pot surplus gave rise to THC-infused coffee.


What Next?

But the same dynamic threatens the more specialized niche, too. Why should a surplus not develop here as well?

The equilibrium-seeking dynamics that push any market toward a minimal profit so long as there are no or only low barriers to entry is precisely why Warren Buffett has said that he looks to invest in castles only if they’re surrounded by unbreachable moats. He isn’t after the minimal profit of competitive markets, and greater profits than that are sustainable only if there is something that blocks entry.

In the case of the product described above, two habit-forming substances can be combined through one easy-to-use device. It seems on the face of it that competitors will flock to this opportunity like bears to honey. It will become, to mix metaphors a bit, one thoroughly bear-infested castle.

Intellectual property rights don’t do much, if anything, to limit competition in this area now. The patent on the original K-cup design, a design formerly owned by Keurig and widely licensed, expired three years ago.

Is Fairwinds Manufacturing, the Washington state company behind a brand of marijuana-infused coffee known as Catapult, worried about an influx of new castle dwellers, or does it have a moat?

In a recent interview James Hull, the proprietor of Fairwinds, sounded unconcerned about the prospect of overcrowding. “There are only so many I-502 retailers in Washington state,” he said.  As to Fairwinds’ own policy, “We try not to work with stores that are only 5 or 6 minutes from each other,” precisely so that they won’t set off price wars at the retail level.

At the manufacturing level, too, Hull isn’t feeling competitive pressure. The moat here is the simple fact that infusing cannabis oil in coffee isn’t as easy as the uninitiated may think. “Oil is not soluble in water, and there is an art to it.” He knows of “a couple companies that are doing this [THC infusion] with tea” but their packaging generally contains a caution that something, such as cream, must be added, an indication that they don’t have the separation problem quite licked and are relying on that other ingredient to disguise that fact.

“Technology is our friend,” Hull said.


Investment Opportunities

In the event that these thoughts cause some readers of MJINews to wonder about investing in Fairwinds: the news is ambivalent. When asked whether he was open to investment, Hull said, “That’s the long-range plan, but I’m not now looking for investors.” He started the business in July 2014 and started selling earlier this year.

While he isn’t currently looking for investors, Hull later added, “I am always open to strong team partnership as long as there is value on all ends.”

Jennifer Lanzador, the sales manager for Uncle Ike’s, says that Fairwinds’ Catapult is “a very nice steady seller” and that Uncle Ike’s customers have been eager to try the product since the launch of the single-serve pods.

Lanzador in effect acknowledged the competition at the retail level. She said that she believes there are now 12 stores in Seattle that could choose to carry the product, and that “Uncle Ike’s always tries to be the lowest in Seattle on our pricing.”

When asked about Fairwinds’ position as a manufacturer, though, Lanzador said that no one else in the market of I-502 recreational cannabis to her knowledge produces infused coffee at present. Further, and also good news for Fairwinds, she made the observation that in Washington “I-502 recreational stores cannot be producers or processors of cannabis per state regulations.”

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