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Charlotte’s Web Getting More Aggressive in the U.S. CBD Market, But Questions Remain

Charlotte's Web (CWBHF) recently announced it added grocery giant Kroger (KR) to its growing list of retail outlets it will sell CBD products through. That will add another 1,350 outlets to its already impressive retail distributor base.

Deanie Elsner, CEO of Charlotte's Web, said this about the deal:

"Since its founding, Charlotte's Web has been on a mission to make CBD products available for as many people as possible. This distribution reach through Kroger's market leading network of grocery stores is an enormous contributor to our mission..."

With Brightfield Group projecting CBD sales to soare to $22 billion by 2022, Charlotte's Web is positioning itself to take a nice chunk of that revenue.

The biggest question concerning CBD to me is whether or not the estimated growth in sales is too optimistic, and expectations need to be lowered.

CBD growth expectations

The first thing to consider in regard to CBD growth expectations is if the $22 billion revenue projection is overly optimistic, within the short time frame it is expected to reach that level, which less than 30 months.

Also important in relationship to Charlotte's Web is not only what percentage of that revenue it'll grab, but if it will be able to brand itself via a variety of CBD products to allow it to stand out in the minds of consumers. It's one thing for CBD sales to soar, it's another thing for a company to separate itself in the minds of consumers against their competitors. CBD could easily, in general, become a commodity market that competes primarily on price.

That's why I remind investors continually that CBD should be considered similar to the vitamin and supplement markets. It's going to cater in some degree to the same type of customers, and since government entities like the FDA don't allow CBD products to be touted as cures or treatments for diseases, it makes it harder to pull away from the pack.

That's why Charlotte's Web need to offer CBD products to the market based upon what consumers determine the value of specific products are to their health. That's how the vitamin and supplement markets work.

Beyond compelling packaging, Charlotte's Web will have to find ways to convince consumers some of their CBD products are worth a higher price point.

One way it is doing that is in the types of partners it will distribute through, such as Kroger. Even so, some of its competitors have done the same, so in going head-to-head with its major competitors, investors will need to identify how the company will differentiate from the plethora of products offered by a growing number of companies.

Those best able to brand should be able to not only generate the most revenue, but also wider margins and stronger earnings, because consumers are willing to pay a premium for their products.

Charlotte's Web's distribution reach

With the addition of Kroge to its distribution network, Charlotte's Web now has 5 major retailers it's distributing through, along with a number of specialty retailers. It now has a presence in over 8,000 U.S. locations it can distribute its CBD products through.

In the Kroger universe, it will not only sell through the main grocery store bearing that name, but also via Dillons, Fred Meyer, King Soopers, Fry's,  Mariano's, Pick 'n Save, QFC and Smith's, aka the Kroger Family of Stores.

What's important isn't the number of distribution outlets is has, but the level it can leverage those locations to generate a profit. It also has yet to prove it will be able to sustainably grow revenue and earnings at the many stores it now will sell through.

While the company claims it is "the most sought-after CBD brand," it's far too premature to make that claim. We're just in the very early stages of the CBD market, and it has yet to be determined who the long-term winners will be.

Conclusion

Charlotte's Web is positioned well to back up that assertion, but I believe the key will be which companies brand the best and are able to, for the most part, compete outside of the commodity CBD market.

What I mean by that is in any retail market there will be loss leaders and low priced products to get consumers to try them out, with the purpose of getting them interested in trying out premium products.

Word of mouth concerning the effect specific products have on various health conditions will be a big part of CBD winners, and that will have to come from feedback from consumers because of the restrictions by the FDA in the U.S. concerning making claims about healing and curing conditions.

I believe there will be another part of the CBD market which after research and confirmed results, will open up a potential market similar to pharaceuticals. GW Pharmaceuticals and Epidiolex are the obvious example of that.

If Charlotte's Web ever is able to offer those type of CBD products that are considered legitimate treatments by the FDA, it would have the potential to generate billions over time.

But as the company stands today, it does have a strong foothold in the retail market, and if it is able to successfully differentiate itself from competitors, it has a strong growth trajectory ahead of it, even if the CBD market doesn't reach $22 billion in a couple of years.

If it doesn't drop the ball, it should reward shareholders over the next few years at least.

Charlotte's Web has a small, but vocal camp of bullish analysts with positive expectations for the stock. Out of the 3 analysts polled by TipRanks, all 3 rate the stock a Buy. With a return potential of 27%, the stock's 12-month consensus target price stands at C$29.50. (See Charlotte's Web's price targets and analyst ratings on TipRanks)