On the latest installment of Civilized's new podcast 'Cannabis & Main,' host Ricardo Baca chatted with Loren Padelford - Vice President and General Manager at Shopify. Ricardo and Loren discussed the the many challenges and opportunities for cannabis businesses in the e-commerce space, the future of online marijuana sales in North America and what makes the Canadian province of Ontario the '900 pound gorilla' of the cannabis industry.
Transcript: 'Cannabis & Main' Episode 104, “Cannabis & E-Commerce”
Ricardo Baca: Hello, hello and welcome to Cannabis & Main, a Civilized podcast where we extract one sliver, one tiny little slice from today's cannabis scape, and go deep. I'm your host, Ricardo Baca, Founder of Grasslands and The Cannabist. It's great to be with you today. Of course, you can learn more about this show, alongside The Marijuana News and Cannabis Lifestyle coverage you crave from Civilized found on the world wide web, at Civilized.life.
This week, we are going to shine a light on cannabis and e-commerce with a guest who is an executive at one of the world's leading multi-channel online commerce companies. I know you've heard of them. I promise you you've heard of them. E-Commerce, I get it, it's hardly the sexiest subject for a podcast, but when you're talking about cannabis e-commerce, the conversation suddenly becomes a lot more interesting.
CBS Money Watch [quote from a 2016 report played on air]: Overall, the legal marijuana industry is raking in the cash. A new report from the *[Arkview 00:01:12] Group shows legal marijuana sales grew to $5.4 billion dollars last year. That's up nearly $1 billion from 2014. Demand isn't expected to decline, either. Predictions show the marijuana industry could bring in nearly $7 billion dollars this year.
Ricardo Baca: Of course, cannabis is federally illegal in the U.S., and there are no online THC marijuana sales happening in this part of North America because the plant and its many products aren't even supposed to cross state lines. However, there happens to be a mammoth country to the north of our border that is in the process of implementing its own federally legal adult-use marijuana market. Let me tell you about how e-commerce is transforming the way cannabis is purchased and will be purchased well into the future in Canada.
In fact, Canadian behemoth, Aurora Cannabis, just announced in mid-July that it has reached an agreement with e-commerce giant, Shopify, to power the marijuana business's sales domestically and even globally. That's huge. I'm psyched that our guest today is one of the executives who made that deal happen. So, producer Vince, let's jump on in.
My guest today is Loren Padelford, Vice President and GM at Shopify. Loren, welcome to Cannabis & Main. Thanks for joining me.
Loren Padelford: Ricardo, thank you very much. I'm happy to be here.
Ricardo Baca: You know, I'm from Colorado, you are from outside Toronto.
Loren Padelford: Mm-hmm, from Waterloo.
Ricardo Baca: You know, retail, to me, in the modern era is all about online commerce, but obviously we have some issues with that down south where I'm from in the US, but it's a totally different story up here. Can you lay out the landscape? What does e-commerce look like in Canada right now on the precipice of legalization?
Loren Padelford: Commerce and retail are a really interesting topic right now for a lot of reasons. If you removed cannabis by itself, you could have a whole conversation on just the massive disruption in retail. What's happening to retailers and what's happening online with e-commerce, I think there's a little bit, just to give context, of a misnomer.
There's a lot of talk about the retail apocalypse and how retailers are falling apart and all going bankrupt. The problem with that is it's just not true. It's true in a very certain sense. It's like really bad retail—retailers that are really bad at customer experience and their locations are terrible—they're going out of business. But they should, right? If you're a terrible retailer, you shouldn't be a retailer.
Ricardo Baca: True.
Loren Padelford: While e-commerce is growing, I think people forget that e-commerce is still only 10 percent of the retail market.
Ricardo Baca: Wow, really?
Loren Padelford: Yeah, so we get a lot of attention, and there's lot of talk, but as a spend perspective, e-commerce is still only 10 percent.
Ricardo Baca: Even including the big dogs?
Loren Padelford: Yes.
Ricardo Baca: The Amazons?
Loren Padelford: Yes.
Ricardo Baca: The—
Loren Padelford: Yes.
Ricardo Baca: Wow. That's very surprising.
Loren Padelford: Yes, and most people are shocked by that because they figure e-commerce must be 50 percent of the market by now, and it's like no, it's a tiny fraction of the market. It's growing very quickly.So regular retail grows at about 6-8 percent a year, whereas e-commerce is growing 20-30 percent a year. So, it's growing quickly, but it's still small.
Regular retail - physical stores are still growing 6-8 percent a year. So everyone thinks physical is going away and you're never going to walk into a store again, and that's just not true. Humans love interaction. Alright? We love touching and feeling things, and we love other humans, so it's just ingrained in us to want to go out to a place. So, physical retail never goes away. You just have a mix.
I'll characterize it in this way. Consumers - you and I - we actually no longer care about this delineation between online and offline. I just want to go shopping in whatever format I want to go shopping in, and I want it to be fun, and easy, and frictionless. So that's the game that retailers of all shapes and sizes are in right now, is to create a shopping experience whether it's online, offline, on mobile, in a store, wherever it happens to be, that me as a consumer will actually like and that will be easy for me to transact in.
So then you shift to cannabis in Canada. We get asked the question a lot: "What is Shopify doing in the cannabis space?" And I think my answer to that is, well, it's not quite us in the cannabis space, it's Cannabists are now about become retailers. So if you look at the legislation, if it becomes legal, and I'll state for the obvious fact it's currently not legal to sale recreational cannabis in Canada. We can sell medical. But should it become legal then what happens is, is in the provinces - which are state/federal for our U.S. friends - so the provinces then get to decide the distribution mechanism. You have online, you have in-store, you have provincially-run, or you decentralized or privately-run. Each province is a little bit different in how they're going to do it.
In one example, like Ontario, which is our biggest province by population, is centrally-run. The government of Ontario will run the cannabis retail locations, so they will have both online and in-store. You'll be able to walk into a physical location and buy recreational cannabis, and you'll be able to buy recreational cannabis online. Some other provinces run that way. Some provinces are totally decentralized, so they've issued private retailer licenses and all of that will be done through private retail companies. I think it is unique in a Canadian perspective, in that we've been doing medical for a while.
Ricardo Baca: Right.
Loren Padelford: And medical, you can buy online right now. You can go to a website. As long as you have a medical prescription, you can buy that and it will be shipped to your door from the licensed producer. That exists today. Part of the reason we can do that is we have banks in Canada who will allow those transactions to happen. So, we have a clean mechanism to pay for cannabis in an online environment.
Ricardo Baca: What are the other regulated substances that are sold on Shopify every day? I mean, I'm guessing you guys have alcohol partners, perhaps, or a tobacco, or something else.
Loren Padelford: Yeah, there is alcohol on Shopify. Budweiser's a big customer, Pernod Ricard is a big customer, Irish Distillery is a big customer. So, there are alcohol stores that you can buy alcohol on Shopify that have their own regulatory structure. There are certain nutraceutical/pharmaceutical products that are sold on Shopify.
Ricardo Baca: So you guys have experience in the regulated market where you have to check government IDs, or prescriptions, or whatever it might be.
Loren Padelford: Yeah, I think our approach is we give our regulated customers a tool set. That tool set can do lots of different things. So, if you needed to do age verification - let's say that was a regulatory requirement for your store - we can give you that capability. If you needed to do address verification, we could give you that capability. It really becomes, 'Here is the toolbox that we give you, now you take the toolbox and apply it to the industry in the way you need to. If you don't need to do any of those things, great. You don't have to turn any of it on.' Our approach is to provide as much flexibility and functionality as we can that allows any retailer in any industry to apply Shopify to their industry. Some are regulated and have more rules that they have to comply to.
Ricardo Baca: Sure. So moving forward, here we are marching toward the recreational era in Canada, you guys just announced a big partnership in the last couple of months with a big government agency that's going to be selling a lot of cannabis up here. Can you talk about that deal moving forward a little bit?
Loren Padelford: Sure. What we announced was—I talked about the Ontario government, being the largest province for population in the country. They have an organization called The Ontario Cannabis Stores, which is their new entity that falls within the liquor bureau of Ontario, and that's the way they will sell cannabis in a regulated market and a recreational market. So, they'll have physical retail locations you'll be able to go in. Think the ABC Liquor Stores, or stuff like that in the US. Same idea.
Ricardo Baca: Yeah.
Loren Padelford: And, they'll have a big online store. So, both of those - their e-commerce store and all of the in-store point of sale, cash registers, readers, iPads - [are] all being powered by Shopify. We're very, very excited about that partnership. Given this year's size and volume of that province and that organization, it's a very large opportunity, but it's also just - for us - it's a great opportunity to showcase the potential of a deep partnership between technology, retail, and the government. I think that's really special. It's one of the first forays into government contracts that Shopify has made.
Ricardo Baca: Oh, really? Wow.
Loren Padelford: So it's unique for a lot of reasons. Usually, governments aren't retailers. It's not a traditional thing for a government to be involved in. And it's Canada. It's a great Canadian story, right? As Canadian governments, Canadian Provinces, Canadian technology partnering in a uniquely Canadian industry at the moment.
Ricardo Baca: True. Didn't you say that the Ontario liquor bureau is basically the second largest—
Loren Padelford: Yeah, I mean, someone can fact check this, but I'm fairly confident that the LCBO, which is the Liquor Control Board of Ontario, is the second largest distributor of alcohol in the world. If you're in France or you're in Australia and you ask a winery, "Do you sell in Ontario?" Their answers are always, "Oh, man. The minimum requirements to sell in Ontario are so large because the population is so big, and the stores are so large."
Yeah, they're a fascinating organization, they're world-class at whatever they do. It's going to be really exciting, and I think it's absolutely in the 900 pound gorilla in Canada for sure, and given their size and scope, this would be, I would suspect — no one knows what will actually happen — but I would suspect one of the biggest cannabis distributors in the world as well upon legalization. So, it's exciting to be partnered with them.
Ricardo Baca: What's funny, too, is we're having a conversation where I'm calling these laws progressive, and you're calling the situation unique. Of course, because of the substance that we're talking about, yes. Those are both right. But we're also talking about the most basic of physical distribution methods out there that's possible, but the only reason it seems unique or progressive is because in so many cases, Americans ruined drug policy for all of our neighbors and for much of the world.
Brief example, the Texas Medical Cannabis Market, they have a couple of licensed shops down there. It's high-CBD/low-THC only. There's one condition that you can qualify for a license, and it's intractable epilepsy. That means you've tried a number of medications, traditional medications, unsuccessfully. But again, this is high CBD/low THC. This is not going to get you high in that euphoric sense of the word. These businesses cannot distribute their medicine via the post service, or UPS, or DHL. They have to handle it themselves, or via private courier, in a state the size of Texas.
There's two or three shops open now, so this is a classic idea of how ridiculous American drug policy is, for one, but this is the reason why we're using words like "unique" or "progressive" even though it's kind of a broken system when we have to call, ;Oh yeah, they're just sending it in the mail.' You know? I think they're just still scared of possible diversion in the US where they allow that kind of delivery methodology, but ultimately, Canada never saw a ton of diversion from its medical program. That was really occasional, from what I've read.
Loren Padelford: Yeah, I think you're highlighting a really good point, which is—I've spent a lot of the last few months reading the history of the end of prohibition, alright? It's actually kind of fascinating because it reads exactly like the hyperbole that's happening right now. It's almost mirror imaged in the concerns everyone is raising about what will happen, should we legalize recreational-use cannabis.
Yes, it's a unique product. Yes, it has to be controlled. Yes, diversion is something security of the supply chain. All this is paramount. I think for us, as a company that works in retail all the time, a lot of those particular challenges have been solved in other industries. This isn't the first regulated product to be delivered to people's houses. This isn't the first regulated substance to need a secure supply chain. This has been done before.
Ricardo Baca: It seems familiar somehow.
Loren Padelford: Yeah, the product is unique, for sure. But the thing that's going to happen, selling things to consumers and delivering it in a secure way happens every day around the world in multiple industries. We're not really reinventing any wheels here. From Shopify's perspective, if you look at what we had to do to satisfy the cannabis retailers, the answer was, nothing. We kind of already did it because this is retail.
I think a lot of what we're trying to do is educate our new customers, our new retailer partners and be like there are mechanisms to do a lot of these things that seem concerning to you just because you haven't been a retailer before. Here are ways are to make all this work in a secure fashion, in a safe fashion, that other people have done first. But then I also think there's a big education curve that comes with the legalization of anything new is it will take a while for the dust to settle and everyone to realize, 'Oh, okay so the world didn't end here. This is normal retail distribution with some extra checks and balances, which are important and critical to the mandate.'
Ricardo Baca: Absolutely.
Loren Padelford: You know, but we do this already. I think that's the part that I'm most encouraged by, is like, there's nothing - in this distribution model, there isn't anything that is so unique, it's never been done before.
Ricardo Baca: It's the right way of looking at this. And Loren, it's really an honor talking to you because you're in the thick of this very fascinating conversation that not a lot of people understand. I'm glad you're here sharing your expertise. Now, I'm going to ask you to kind of dream big in the next five, 10, 20 years. [What] does the future of e-commerce in cannabis look like to you as these regulations loosen down in the states? As recreational is implemented up here? As the world progresses and our expectations about cannabis, a substance that kills zero people annually in the US compared to [approximately] 90,000 Americans dying a year from alcohol alone. What does the future of e-commerce and cannabis look like if we're dreaming big?
Loren Padelford: You know, this is where I spent a lot of time is looking at the market and saying, 'What is the technology that this industry will need over time to really engage customers in the way that consumers want?' One of the challenges that you can just immediately see with cannabis is, cannabis is very tactile. Right? It has a smell, it has a feel, it has a look. It's a very experiential purchasing process. And then add oils and all of the other stuff, and it spins off after that. Well, online has never been really great at that tactile consumable product market. You could show really beautiful pictures - high resolution pictures - but in something like this, touch is important, and smell is important. It's like, how do you translate that into an online space?
In my mind, you immediately move to things like, how do you do augment reality in virtual reality experiences? You want to go far forward, so you see a bunch of companies creating the haptic suits and the haptic gloves that allow you to touch and feel things in virtual reality. It's like, 'Well, could you create experiences like that, that allow people in a virtual space to interact with the product that looks, smells, touch, feels ways so that it enhances the buying experience?'
So I think there is just lots of opportunity here, both that it's huge market, that it's going to develop in countries at different paces, it's going to have different structures. But it lends itself to retail, and it lends itself to technology in a lot of ways. So, how do we, as a company who supports retailers, provide that technology in a compelling way to the customer so that they can engage with their consumers? The size of this market globally is, I think, hard to understand because it's very rare to see something like this happen. I don't think any of us have ever seen one. None of us have been alive-
Ricardo Baca: Once in a lifetime.
Loren Padelford: Yeah, absolutely. So, like I said, as a retail supporter, just to see a new market burgeon out like that and to be involved, and to listen to the conversations and talk to the governments is fascinating. Yeah, it's going to be a really exciting few years as this spins up, and it changes and adapts, and we're really glad to be part of it.
Ricardo Baca: You know, we talk about this as the unique substance that it inevitably is, but at the same time we're talking about a retail technology platform and you guys are just doing what you do. I run a public relations agency and we work with a lot of businesses in cannabis and hemp, but we work with businesses that aren't in this space, either. It comes down to this is just another industry, and that's exactly what this industry wants, is that level of acceptance, legitimacy, and to be taken seriously. I think the fact that companies of the caliber of Shopify are working in legal cannabis and lending it legitimacy. Loren Padelford, Vice President and GM at Shopify. Thank you so much for joining us here at Cannabis & Main.
Loren Padelford: Thanks, Ricardo. This has been a lot of fun.