California cannabis companies sell assets, narrow focus to save money

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California cannabis, California cannabis companies sell assets, narrow focus to save money

Vertical integration was the name of the game when California launched its recreational marijuana market in 2018, as companies handled everything from cultivation to retail sales and home delivery.

Four years later, small and large operators across the state are unloading assets, shuttering business lines and letting coveted licenses expire in order to cut costs and narrow their focus in the world’s largest marijuana market.

NorCal Cannabis Co., which is focused on building its flower brand, is among those weighing another divestiture – in its retail operations.

The company operates a retail location in Long Beach and Santa Ana, and is building stores in Santa Rosa and downtown San Francisco, near its headquarters.

“Ideally we may keep two of those,” said co-founder and CEO Jigar Patel. “We don’t look at retail as much as an outlet for us.”

NorCal Cannabis, like other big players in the market, cast a wide net after its inception in 2015, implementing a multichannel approach in an effort to capture business and scale operations across segments.

It became one of the largest delivery providers in the state, handling some 3,000 daily orders in a coverage area totaling 18 million residents.

It was also losing dollars on every delivery.

In the first quarter of 2020 when other competitors doubled down efforts amid growing consumer demand at the onset of the pandemic, NorCal Cannabis exited the delivery segment altogether, cutting partnerships and selling off assets.

The company, which has raised $60 million in funding, saw growth capital dry up, according to Patel, spurring NorCal Cannabis to focus on cultivation and brand development.

“We had to make hard decisions,” he said, but the divestitures helped management improve operations and expand the brand, which is now carried in 400 dispensaries.

“For the first time in many years, it’s given us the opportunity to focus strictly on our core business and really strategize on how to build brand in California,” Patel said. “It’s such a competitive market.”

More supply chain constraints

In 2017, Eric Sklar set out to partner with the industry’s top growers, packers, distributors and retailers.

It was a similar recipe he followed at his successful Napa Valley winery, which bought 95% of its grapes from other growers.

Reality quickly set in.

“It was impossible to go into business without being more vertical because the supply chain wasn’t mature,” said the founder of the cannabis business Napa Valley Fumé.

So the company acquired delivery, manufacturing and distribution licenses, and struck a retail partnership with San Francisco-based delivery leader Eaze to complement its outdoor cultivation operation in Lake County.

“We started five businesses at the same time,” Sklar said. “We knew that wouldn’t be forever. It just wasn’t feasible. But we had to do it or we weren’t going to be in business.”

About two years ago, Eaze acquired its retail business. Fumé now outsources all manufacturing, focusing strictly on its grow operation and brand development, much like NorCal Cannabis.

Top line revenue and margins are improving, according to Sklar. The company’s two brands are carried in about 25 California dispensaries, with plans to hit 100 by year’s end.

The strategy is focused, Sklar said.

“We have two brands, we don’t have 20 brands that we don’t own,” he added. “We’re not doing retail or manufacturing. And it’s working out really well.”

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Picking a lane

Last year’s collapse of California’s wholesale cannabis market pushed Eco Farm Holdings/Thrive Society to zero in on distribution, its digital marketplace and technology development.

The Santa Rosa-based company, which also has three farms, a nursery and manufacturing licenses, won’t plant crops this year or possibly next year, if market conditions don’t improve.

It’s leased two farms and is searching for another partner on the third.

“Whenever the market kind of rolled out, the name of the game was being vertically integrated,” said co-founder Danielle Dao.

“But, you know, being as fragmented as the supply chain is, people need to very much focus on their core competency. What I call pick the lane.”

Sustained unfavorable market conditions made the decision easier for Dao, a farmer by trade.

“If the market hadn’t created such a big dive from oversupply last year, we would have kept our farms,” she said.  “I was a farmer for 20 years, and I miss it very much. But the competition out there is really, really high.”

Path to profitability

It took Euphoric Life Inc. four years to get its manufacturing and distribution business operational, finally opening its doors in 2020 in Hollister, near Monterey Bay on the Central Coast.

Like others, it started developing a litany of products and launched its own brand.

Within a few months, sales eclipsed a total of $25,000.

The good run lasted four to six months before the market was flooded with competition, according to Chief Operating Officer Aiden Rafii.

“All of a sudden people started making similar products to us and just cutting the prices,” he said.

As overhead grew, so did losses, reflecting high capital startup costs, local and state taxes, and other regulatory-related expenses.

In one recent example, the fire department asked the company to remove a waste storage cage after the department requested its installation, an unplanned removal cost of about $20,000.

“It’s just nearly impossible to break into the green,” Rafii said.

Last November, when the wholesale market hit rocket bottom, Euphoric Life stopped selling its Exir brand of pre-rolls and infused pre-rolls.

Now it’s concentrating on contract packaging, white label manufacturing and contract extraction.

The company has largely exited distribution as well, outsourcing that to another service provider, saving upwards of $800 per delivery trip to Los Angeles, roughly 300 miles to the south.

Upfront costs have been lowered significantly, as the company no longer needs to purchase packages every month or commission expensive lab tests.

Euphoric Life won’t likely renew its distribution license in June, saving nearly $15,000 in annual licensing fees.

The company still faces major challenges tied to the stagnant wholesale market – it’s currently sitting on 17 kilograms (37 pounds) of extract – but senses a financial turnaround in the works.

“I think there is a path to profitability,” Rafii said. “The co-packing move has been a saving grace for us.”

Chris Casacchia can be reached at