Arizona MMJ company shares lessons learned from expanding into multiple markets
by Omar Sacirbey
When Steven White and his two partners founded Harvest Inc. in Tempe, Arizona, five years ago, none of them imagined that the company would eventually have dispensaries and cultivation sites in three states. In fact, they would’ve considered it a stroke of luck just to win a single cultivation/dispensary license in Arizona.
“The vision was just to see if we could get one of the licenses,” White said.
He and his partners knew they were going up against some well-known and well-capitalized applicants in Arizona, and they worried about whether they could compete.
“The reason we had no confidence was because we didn’t think we had a very good understanding about the licensing process,” White said.
The fear that they didn’t truly understand what they were getting into – and could therefore fail – ultimately drove White and his colleagues to go “overboard” with the application process, as they devoted fanatical amounts of time and attention to produce strong applications. It worked: The trio actually won two licenses and opened their first grow site and dispensary in Tempe in 2013.
Harvest has since expanded into Nevada, where the company has stakes in six licensed dispensaries, four cultivation sites and four production facilities in the Las Vegas area. It will directly operate two of those dispensaries. It also now has a solid presence in Illinois, where it holds minority stakes in and will actively operate three dispensaries.
And that could be just the start.
The company has applied for a whopping 27 dispensary licenses and a processing license in Maryland. It also has thrown its hat in the ring for a cultivation license in the tiny town of Hancock, where it recently made waves by cementing a deal to give the city an equity stake should it win a permit.
With three states under his belt and more likely to come, White has learned a few things about expanding into multiple markets and managing a company with operations spread out across the country.
Expect the Unexpected, and Be Prepared to Pivot
White learned his first lesson about expansion – brace for unseen challenges – in his home state of Arizona.
After winning its first license there, Harvest secured a second one in the town of Springerville, which is located in a rural part of eastern Arizona. The company initially thought it would be the only dispensary in the town, but there was a mix-up.
Arizona regulators divided up the state into 126 areas, each of which is allowed to have one dispensary. Based on what White said were inaccurate Google maps, Harvest thought Springerville was in the middle of the area it applied to, Round Valley. In fact, Springerville sits on the border between the Round Valley area and a neighboring area called St. Johns. The result: Another dispensary had already opened its doors in the St. Johns area side of the town, which has a population of just 2,000 people.
White and his team decided that staying in an area with a small market and an existing dispensary – which wasn’t even getting much traffic itself – would be a mistake. But leaving could have meant losing the license, as Arizona laws at the time required companies to start up operations within a year of landing a permit.
The law also said a rural dispensary could move to an urban location, but only after three years. The company had already purchased a building in Springerville and planned to hold on to the property until it was allowed to move. But it also pursued another course of action, becoming a plaintiff with about 10 other dispensaries that sued for the one-year opening requirement to be waived.
The lawsuit was successful, and Harvest was able to keep its license. It is now trying to find a location in the Phoenix area and is renting the building free of charge for a dinosaur exhibit.
Mix Up Your Ownership, Operational Strategies
Harvest became interested in Nevada after noticing that the state’s application requirements and laws seemed similar to those in Arizona. Since the company already collected most of the information it needed about its business during the Arizona application process, White and his colleagues figured applying in Nevada would be relatively easy.
For the most part it was. But in Nevada, the company ran into problems figuring out what the different types of municipalities required, including stipulations surrounding residency rules.
While Nevada didn’t mandate that cannabis business owners be state residents, White believed that the application scoring system favored locals.
“It created a situation where (we thought) having Nevada residents on the team would be really important,” White said. “We needed a Nevada partner to improve our chances.”
In the end, Harvest took minority stakes in six dispensaries it helped land licenses for in Nevada. In hindsight, however, White said he would have done things differently.
“In Nevada, we ultimately approached that market with the assumption that a minority interest for an out-of-state partner like us would make it more likely that we would have greater success gaining license interests. And while the approach was successful, I’m not so sure that it was necessary,” White said. “But we made the best decision we could with the information that we had.”
Based on that experience, the company has modified its approach in Maryland. Harvest has filed 27 dispensary applications there, some in which it is the majority partner and some in which it is the minority partner, as well as one processing and one grower license.
Bring on a Cultivator
As a lawyer in Arizona, White developed the skills needed to navigate complicated laws and knew where to get the information he needed to fill out applications. He initially tried to get some of his colleagues in the legal world on board as partners, but they declined.
That turned out to be fortuitous.
White turned to a pair of friends who ran a firm specializing in cultivation facility design and construction. He didn’t know it at the time, but their skills would become even more in demand than his – and those of the other lawyers he initially tried to bring aboard.
In fact, another company that owns cultivation and dispensary operations in Illinois approached Harvest specifically for advice from White’s partners.
As White has accumulated experience in the cannabis space, he’s also come to believe that cultivators are the most important aspect of a multi-faceted marijuana company like Harvest, as setting up a wholesale grow operation is the hardest part of the process.
“Developing a cultivation facility that’s 10 times the size of a dispensary, it just takes time,” White said.
Pull Back if Necessary
White has hit some bumps while expanding in general, but managing operations in different states has also proven particularly challenging. Partnerships that appeared solid on paper didn’t always play out that way in real life.
“It’s not easy,” White said. “Each group has its own challenges. With some, the integration has gone better than others.”
For example, early in the Nevada process, one of Harvest’s executives identified a serious cultural conflict with one of its partners, and consequently abandoned the project.
“Cannabis businesses are difficult enough without adding challenging people to the management and operation of a dispensary or cultivation facility,” White said.
Just as Harvest found it more prudent to pull out of Springerville even though it won a license there, White and his colleagues decided to bow out of the partnership in Nevada rather than risk a failure due to bad chemistry.
Finding trustworthy, qualified employees you can lean on in new markets is also critical.
White learned that it’s often more important to bring on employees who have overseen general retail stores in multiple markets vs. those who have cannabis experience specifically in a single market.
“We have employees that have overseen retail stores in multiple markets. That experience is more important than successfully operating a single dispensary or cultivation facility. The challenge of operating in multiple markets stems more from the retail or agricultural factors than the marijuana-related ones,” White said.
Develop an Expansion Blueprint
After having expanded into a few states and researched pretty much every other one where marijuana is or might be soon legal in some form, White believes he and his team know what it takes to win a license in any potential market.
“We haven’t seen a state that we can’t handle in terms of licensing,” White said. “We now have people who are dedicated to the application process.”
Indeed, Harvest has team members devoted to applications, it has already gathered key information about its operations needed to apply in most markets, and the company knows how to win over local communities where it wants to open. In other words, it has developed a blueprint for expansion.
“We’re still looking for new markets,” White said. “We believe we have a model we can replicate.”