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Getting in Fighting Shape

Lume Cannabis Co.

Lume Cannabis Co. in Michigan is following through with expansion plans. Courtesy Photo

Recessions are a time for cost control, but they can also herald opportunity—especially if your industry proves as resilient as cannabis appears to be in the current downturn.

Deciding where to cut costs and/or where to invest in times of economic uncertainty requires research and careful consideration as well as the discipline to rein in expenses and eliminate waste.

These times also demand the foresight and nimbleness to spot opportunities and move on them quickly. Identifying the right investments or costs to cut isn’t easy, so Marijuana Business Magazines gleaned insights from executives across the industry and summarized them here.

 

1 Assess what are essential costs and what are not.

Figuring out where to cut costs and where to invest requires a careful understanding and assessment of your business. In other words, what spending is least important and generates the lowest return, and what is most essential and produces the best payback, said Ted Whitney, CEO of Nug, a vertically integrated cannabis company in Alameda, California.

“Going through that exercise, we were saying, ‘All right, so what are we willing to cut? What are we willing to not have?” Whitney said. “It really is communicating a lot around what’s critical.”

“There were times when we said, ‘You know what? That’s a critical element that’s going to be part of a new item launch. I’ve already purchased $300,000 in packaging, so let’s make sure that goes to completion.’”

Meanwhile, Nug stopped offering daily lunches for 200 employees. “It was significant,” Whitney said of the expense. “But things like that will come back.”

 

2  Be ready to delay state expansion plans.

Some expansion plans are more promising than others, and executives need to be ready to part ways with the sexy for the solid.

That’s what Florida-based Jushi Holdings, a seven-state cannabis company, did in May, when it canceled a deal to buy an undisclosed marijuana retailer in San Diego for around $12 million. Instead, the company is focusing on expansion efforts in states it deems less saturated and more lucrative. The firm recently launched recreational sales in Illinois and medical sales in Pennsylvania, for example.

“We’ve had to deemphasize in California,” Jushi co-founder and President Erich Mauff said, pointing to what he called “structural issues” such as taxes and saturation that aren’t going away anytime soon.

“It’s just an optimization of investible dollars,” he added. “It’s just adjusting to the market environment to try and do things today that you wouldn’t have done four months ago because there was nothing to buy—or, if there was something to buy, the price was wrong.”

That said, Jushi is not abandoning California—just delaying plans to open retail outlets there.

 

3 Alternately, consider accelerating expansion plans.

While some expansions warrant delays, others might merit acceleration if the business is generating revenue and other circumstances are conducive. Take Lume Cannabis Co., a vertically integrated operation in Michigan, for example. Lume had eight stores open in the state in early June and hoped to have 20 by the end of the year. For the next four years, the company planned to open 20 stores every year for a total of 100 outlets after five years.

Business has picked up enough during the first half of the year that the chain is accelerating construction on a 250,000-square-foot expansion to an existing 50,000-square-foot greenhouse.

Or consider Vertosa, an Oakland, California-based company that makes and sells THC emulsions for infused product manufacturers in the state as well as hemp-derived CBD emulsions that are sold to clients nationwide. In May, Vertosa entered the Canadian market, where edibles were permitted in late 2019, through a partnership with Vivo Cannabis, a Canadian license holder.

 

4 Consider sharing licenses through partnerships.

You don’t always have to unload a license to save money. Instead, bringing in a partner to share the costs of a license can be a good solution to keeping an asset you believe will pay off later.

“That came into focus pretty rapidly,” said Whitney, noting that Nug delayed opening stores in the San Francisco Bay Area cities of Alameda, El Cerrito and Oakland and was seeking to “offload” other licenses. Nug was determined, however, to keep the Sundial Collective, a retail licensee in Redding, California.

But the only way to do that was to find a partner who could share the costs. In this case, the company split the license with the partner 50-50. Having the partner relieves some financial pressure—and, because the partner is local, it is better connected to the community and the market Nug seeks to serve.

“Splitting a license with an operator has been a really successful way for us to get down the cost of opening up a new shop,” Whitney said.

 

5 Manage your workforce effectively.

Layoffs and furloughs are often inevitable in a recession. But for businesses in solid financial positions, recessions can be a good time to find top talent for good value.

“There is a plentiful supply of very talented people that are available,” said Lume CEO Doug Hellyar, noting the company was in hiring mode to staff the dispensaries it planned to open throughout the year.

Thanks to store openings in Illinois, Pennsylvania and Virginia, Jushi has been a “net adder” of jobs, Mauff said, but the business also has had to cut staff to stay efficient and free up capital for expansion.

The cuts have mainly involved general corporate and administrative positions. “That’s always where you want to get rid of people. We’re not as actively doing M&A, so we can get rid of some of those people,” Mauff said.

 

6 Don’t gut your marketing department.

Another department that often gets cut during economic downturns is marketing, although executives warned against doing away with your company’s communicators altogether: They provide a link to your business’ audience.

“We trimmed our marketing spend a little bit on the channels that we thought were going to be quiet no matter what and conserved cash so we can turn it back on as the market comes back on,” said Kim Rael, CEO of Azuca, a multistate infused product company based in New York. The marketing efforts that took the biggest cuts were for CBD products in brick-and-mortar stores, Rael said.

“We’ve downsized our marketing department, but we haven’t cut it outright,” Nug’s Whitney said. “It’s so critical that we’re communicating what we’re doing and we’ve got the bandwidth assigned for how we communicate to our customers.”

 

7 Retrain your existing employees to take over new responsibilities.

Laying off some people means those who remain must assume the work of those who’ve been let go. It’s up to company leaders to ensure the remaining employees are trained to pick up new types of work.

“You also have to teach people to do new things in lieu of the jobs and skill sets that have been lost. There are people from packaging who have never filled vape carts before,” Whitney said. “People who do it regularly can do 500 per hour, but the new ones are getting about 75 to 80 per hour. But with training, they can get close to 500 per hour.

“Figuring out those gaps and how to make it easy on people has been a big challenge. We don’t want anyone beating their head against a brick wall all day,” Whitney continued. “You’re going to find ways to get them up to speed quickly and efficiently. So, being patient, offering the right training, offering support, offering encouragement, I think, are all very important things.”

 

8 Renegotiate bills and contracts.

Another way to save money is renegotiating and delaying bill payments. For example, Vertosa roughly halved its rent by renegotiating its lease with the landlord. Specifically, the firm decided to keep the lab portion of the space that it rented but directed front-office staff to work from home, allowing the company to eliminate the office part of the space.

“We had a really good landlord and said, ‘Hey, we only need half this space,’” noted Austin Stevenson, Vertosa’s chief innovation officer. The company also has taken advantage of a reduced-rate offering from its utility company, PG&E Corp. These cuts, in addition to a relatively small number of furloughs and layoffs (less than 10% of the overall workforce, Stevenson said), have helped the business cut 20%-30% of its costs.

Nug also benefited from renegotiation “on all sides,” Whitney said. For example, although Nug is vertically integrated, it still needs to buy biomass wholesale from other cultivators for its concentrate production.

One cultivator with whom Nug has a good wholesale relationship is essentially fronting biomass to the company for its concentrates and giving Nug 30 days—sometimes 60 days—to pay for the biomass.

“We’ve been able to get good credit terms. We can basically finance some of our buys. We’re able to move the material through, sell it and relay money back up to them,” Whitney said. “They’ve been really good about helping us out in terms of getting biomass on terms that work with our business model, and we get them pricing that works for theirs. So we might pay more than best deal, but it’s worth it for us because it’s not putting us into a cash-flow crunch.”

 

9 Leverage recessionary discounts into bulk buys and higher margins.

To create the emulsions that it sells to infused product companies, Vertosa buys cannabis oils and other extracts in bulk. Stevenson said that since well before the recession, there has been excess extract inventory on the market, resulting in lower extract prices. The recession has pressured those prices downward even more.

And since concentrate can have a long shelf life relative to flower, Vertosa has been buying much more extract than usual but at deeper-than-usual discounts. The company is buying enough input inventory to sustain it for up to 12 months of production, Stevenson said.

“We’ve been able to procure inputs at a lower cost, hold on to them and then, because of the lower costs, sell (our products) at a higher margin than when the cost of the inputs was higher,” Stevenson said. Vertosa also aims to lock in a preferred purchase-price rate for six to 12 months. So, if extract prices go back up, Vertosa has locked in the lower price.

“What we commit to them is an order volume. And that helps us with continuity through the foreseeable future, or hopefully throughout the recessionary period before the market rebounds,” Stevenson said.

Vertosa’s procurement manager keeps a running list of extractors in all of the company’s markets—California marijuana extractors and U.S. and international hemp extractors—and watches their price lists on a monthly basis.

If the procurement manager notices certain indicators moving—such as prices starting to erode on a month-over-month basis or increases in bulk-sales activities—that suggests prices are falling.

“I subscribe to every single extractor we’ve worked with, plus others that we haven’t,” Stevenson said in May. “And I have seen in the past month or so what was a 10% discount has increased to a 20% discount, a 50% discount. And volume requirements to get those discounts has dropped.”

 

10 Create an inventory-management plan.

To maximize the efficiency of bulk-discount buying, Stevenson said Vertosa creates inventory-management plans that are reviewed at least monthly and “aligned” with the company’s revenue and sales forecast. The first step is identifying the firm’s most core and loyal customers and reaching out to them to see what their production schedule is and what their input needs might be over the next 30 to 90 days.

“No. 1: We ensure our current customer needs are met. We make sure to secure inventory for that pipeline of business first,” Stevenson said.

Next, Vertosa looks at what new projects are being undertaken in the next 30 days to 12 months, then figures out how much inventory the company will need if it meets or exceeds sales rates; it then procures that amount.

Finally, Vertosa tries to have enough inventory to conduct R&D as well as keep a buffer of inventory on hand.

“I throw on an extra 20%, 30% buffer to have more than what we need while the prices are down so that we are sustained at a low price with a presumably increased profit margin because we’ve benefited from that price over the next 12 months,” Stevenson said.

 

11 Be aware that THC delivers more bang for the buck.

In recessionary times, businesses should focus on their most cash-efficient revenue streams and deemphasize those that are least efficient. Many cannabis companies are finding that THC products are more capital efficient than CBD products.

Consider Azuca, which serves
12 states and sells THC products through licensees; it also sells hemp-derived CBD products online and in brick-and-mortar stores.

“When COVID-19 hit us, we did an assessment of the business portfolio, and it was very clear that our most capital-efficient business is our licensing business in the THC world,” said Rael, the CEO. “So our pivot has been to double down with our THC partners and expand our THC license initiatives.”

Jushi has also “deemphasized” hemp.

“It was something we invested in when capital was accessible. When things get tight and you start looking at the returns that you can make in CBD from hemp … suddenly your investible dollar in (marijuana) can yield a much better return,” said Mauff, Jushi’s president.

 

12 Recessions offer opportunities to introduce cheaper products.

A recession can be a good time to roll out new products, particularly those that can be sold at lower price points.

“We’ve definitely seen migration towards lower basket rings at the store. There’s been a total uptick in sales, but items that are on the shelf at a lower price are moving faster,” Nug’s Whitney said.

Anticipating an economic slowdown late last year, Nug forged partnerships with outdoor and mixed-light cultivation companies, from which it buys “smalls”—slightly less potent cannabis flower taken from the lower and middle parts of the plant that are smaller than flower picked from the top. Nug puts smalls in 0.6-gram pre-rolls and sells them as a value line called Erb.

“We’re out there buying smalls from different growers around California … and passing on that value to customers. So we’ve got a value-priced line, under the Erb brand, that has just come out,” Whitney said.

 

13 Dream up products by using inputs in new ways.

Using inputs in fresh ways to create novel products is both an efficient use of assets and an opportunity to create new and even surprisingly lucrative revenue streams.

“We have so many things we can flip around into something new just with a minor tweak,” Whitney said.

For example, Nug noticed its customers like formulated, finished products that are ready to consume, such as pre-rolls. So the company began making pre-rolls infused with THCA—a potent, crystallized extract known as “Diamond Dust”—and THC isolate.

“The pre-rolls have been very popular. They’re sold at a higher price point, which makes it easier to take lower margins on other products,” Whitney said.

 

14 Control costs through partnerships.

In addition to offering pre-rolls with THCA, Nug introduced pills made with CBN powder. (CBN, or cannabinol, is a mildly psychoactive cannabinoid produced when THC oxidizes or decomposes.)

Nug couldn’t have executed its pill plan without a pivotal partnership. While the company had the inputs, it didn’t have the machines needed to fill the pills.

So Nug called nearby cannabis companies asking if anyone had a pill-filling machine. CannaCraft, a cannabis producer and manufacturer in Santa Rosa, California, agreed to make the pills and send them in bulk to Nug for packaging.

But CannaCraft didn’t want to let a competitor use its machine for nothing, so the two companies explored ways Nug could help CannaCraft. As it turned out, both companies ran distribution trucks to Los Angeles and figured they could save money by doing it together.

“We’re going to start sharing room on those trucks, and we’re finding new ways to collaborate in the retail space as well,” Whitney said, noting that the cost to use the machines comes out to pennies per pill.

 

15 Keep an eye out for real estate deals.

Recessions have often been good times to buy real estate, which is good news if you’re seeking a cultivation site or storefront. But don’t expect bargains
on everything.

“I’m able to secure better real estate because many restaurants and stores and bars and small businesses are not going to survive” the mandatory closures prompted by the coronavirus, Jushi’s Mauff said. He added that landlords resistant to cannabis businesses are likely to have a change of heart if their properties are sitting empty.

But Hellyar from Lume cautioned that desirable real estate in high-traffic areas, such as those that his company is pursuing in Michigan, haven’t yet experienced price declines.

“There’s really not a lot of softness in those prices,” Hellyar noted.

 

16 Don’t wait to take these steps in bad times; make them habits in good times.

All the above tips can help a company against the ropes fight its way back. But the best strategy is to stay out of financial trouble in the first place: avoid overspending, curb costs, streamline operations, prioritize cash-efficient efforts and jump on lucrative opportunities.

“The key here for us as a business is the preparation you do beforehand, being a very disciplined allocator of capital—whether it’s a cultivation investment, an investment in technology or digital infrastructure,” said Jennifer Drake, chief operating officer at Ayr Strategies, a Massachusetts-based multistate operator. “Making sure that the things you do leading up to more difficult times is an important way to make sure that when you get some more of those more difficult times, you’re in a good position.”

 

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