Chain Reaction

, Chain Reaction

Sweet Leaf is helping pioneer the concept of retail chains in the cannabis industry by expanding aggressively through acquisitions

by Bart Schaneman

The many signs posted at Sweet Leaf’s recreational marijuana store on 26th and Walnut streets in Denver deliver a simple message to employees: “Dominate Today.”

The signs are hung behind the scenes, out of sight from customers. They remind employees of Sweet Leaf’s mission — to be aggressive but, above all, to be the best. The full motto states: “Dominate Today, Get Better Tomorrow.”

That commitment to motivate employees has helped Colorado-based Sweet Leaf build a 350-plus-employee, $60 million chain of medical and recreational cannabis stores in two states – without taking a dime from outside investors. The profitable company sells a wide variety of products, including flower, edibles, concentrates, pre-rolls and topicals.

Today, Sweet Leaf is one of only a handful of marijuana businesses in the nation to successfully pioneer the chain concept and push it forward. Its expansion can serve as a road map for other cannabis retailers looking to follow suit.

Since opening their first store in 2012, Sweet Leaf’s three owners have moved aggressively to expand their footprint. The company has acquired nine medical and recreational shops – eight in Denver and one in Portland, Oregon – with plans this year to open three more in Colorado. By the end of 2017, the owners expect to boast 210,000 square feet of cultivation space, including a grow operation in Reno, Nevada.

Throughout the company’s expansion, the founders have hewed closely to their vision of providing cannabis to the average person. They see their niche as low-cost, high-value flower, while still providing a wide array of other products.

“We want everyone to be able to buy something when they come in,” CEO and co-founder Matt Aiken said. “We don’t want to be everywhere and everything to everyone. But we want to get there eventually.”

Here’s a look at some of the successful strategies Sweet Leaf has employed to fuel its growth.

Consistency is Crucial

Chains live and die by how consistent products look and feel. To that end, Sweet Leaf has a strict in-house testing process that covers everything from a product’s taste to its effect on the user and whether it is compliant with local regulations.

While the company grows its own flower and makes some concentrates, it also relies on outside suppliers that it vets thoroughly. Sweet Leaf must turn to suppliers because it can’t meet customer demand only with the marijuana products it creates.

Only approved products and suppliers are used for any location. And there is a product list of certain items all stores must carry, ensuring the consistency that customers crave from a chain store.

To keep tabs on its stores, Sweet Leaf employs district managers who are specifically designated to visit each one and note any differences.

Using Flowhub’s point-of sale software system, Sweet Leaf ensures that every product is labeled and priced the same, as well as dated in a uniform manner.

The owners also tweak signage and the store colors to maintain uniformity. They even use the same display cases, the same jars and the same type of lighting in each store to make the customer aware he or she is in a Sweet Leaf property.

And while one Sweet Leaf store might offer a few different strains of marijuana, the company uses the same suppliers for its retail spaces so the quality is consistent.

On the budtender front, Nichole West, Sweet Leaf’s vice president of operations, makes sure every employee receives thorough training so customers always receive the same quality experience.

The company wants the look and the feel to be consistent. Sweet Leaf executives will even go so far as to monitor the music choices and the way people dress in the stores.

“All these little things are to keep consistency,” Aiken said. “We’re looking for consistency at every level.”

A Successful Plug-and-Play Model

The quality of the location is a big selling point for any new store. When scouting a potential location, Aiken said company executives look for the basic retail components: a significant amount of automobile traffic, midrange income demographics, the availability of signage, ease of customer access and parking.

“We like to use main thoroughfares,” West said. “If it’s the route you take to work, that’s an obvious win for us.”

The Sweet Leaf location on Evans and Interstate 25 is a prime example. Evans is a commuter road that cuts through the heart of Denver, and I-25 is a major artery for anyone traveling north or south in the city.

Company executives also look for locations in middle- or lower-middle-class neighborhoods, reinforcing Sweet Leaf’s mantra of providing quality, affordable cannabis products to the average person.

When performing due diligence on a business they are interested in acquiring, Sweet Leaf executives place top priority on a clean license record without tax or regulatory violations. The executives also learned they needed to purchase only the physical assets, licenses and goodwill, but not debt-ridden companies.

“We’re not buying net-operating loss businesses,” Aiken said, adding that he and his colleagues look for businesses that are faltering but not belly-up.

The executives make sure the license they are purchasing is competitively priced compared with the market rate, and that the retail location comes with a structurally sound grow room that’s suitably wired for cultivation purposes.

As long as the location is good, the building logistics make sense and the facility doesn’t require a huge construction overhaul, West is confident Sweet Leaf can make the business work.

“We have a plug-and-play model to turn around any business,” West said. “We are a fixer-upper kind of a company when acquiring licenses.”

She and other company executives are always on the lookout for a property they can make more profitable. Two of the locations Sweet Leaf is opening this year, for example, were acquired from owners who “don’t want to be in the game anymore,” West said. Sweet Leaf executives figured they could do a better job running the stores.

Financing the Expansion

From the start, Sweet Leaf’s three founders – Aiken, Christian Johnson, and Anthony Sauro – have avoided outside investors. They’ve wanted to keep control of the company and avoid unreasonable lending terms. The trio began Sweet Leaf in 2011 on two maxed-out credit cards and spent $9,000 in cash. Johnson borrowed to the limit of his American Express cards, bought 40 grow lights and rented an 8,000-square-foot warehouse in Denver.

Real estate was cheap at the time, with Denver and the nation still shaking off the effects of the Great Recession. The three owners purchased their first property at $40 a square foot, which Aiken said would be worth $100 a square foot now if empty, and $200 a square foot built out for a grow operation. Since then, they have plowed 80% of all profits back into the business to scale up and expand.

Those early lean times taught them to be frugal. Aiken said he and his colleagues are very careful with operating expenses, which can easily get out of control when expanding. The company executives meet every week and assess all categories of the business – from the wholesale operation to information technology – and look for ways to save money.

One meeting produced the idea to seek out a supply-chain management company to oversee the purchase and inventory of the company’s growing equipment. In the case of lighting, the supply-management company handles a range of logistics, such as tracking inventory and ensuring the equipment on hand is adequate. The company saved Sweet Leaf 10% on its bottom line and freed up staff time and resources.

West said the move also has saved the company $40,000 in growing supplies, welcome news for a company that keeps close tabs on its costs.

“In our business, we’re extremely tight,” Aiken said. “We never thought we were going to have access to capital.”

That approach has helped the company post a 100% growth rate annually for the past five years in both sales and square footage. Last year the company brought in $60 million in total revenue. West said she and her colleagues are looking at 25%-30% profit margins.

The company’s preference for self-financing has been a point of pride for Sweet Leaf’s owners as they watched other firms take out loans with sky-high interest rates and personal guarantee terms to operate or expand.

“We’ve never borrowed a single dollar (from outside the company),” West said. “It’s been reinvest, reinvest, reinvest our own money.

“That’s not to say we’re above investment money, but they wanted to get to a place of success before they took money,” she said of the company’s owners. “We’re at an interesting place right now with how big we’ve gotten with just us.”

In fact, the company is now more willing to entertain outside investment to bankroll its expansion into new rec and medical markets, given that the cannabis industry has stabilized and better financial opportunities abound.

“You need capital,” Aiken said.

To that end, Sweet Leaf executives have had serious conversations with private bankers and hedge fund managers – “people with actual capital that it’s not going to be some insane interest rate,” West said.

Company executives also are keeping their eye out for potential partnerships that would help fuel the company’s expansion.

“We don’t want to take bad money,” Aiken said. “But added-value partnerships, absolutely.”

Slowing Down to a Gallop

Sweet Leaf executives are now ready to downshift to ensure they’re managing the company’s growth wisely. The company has added 200 employees in the past year. Aiken noted that managing so many new employees can be difficult while also trying to expand the business.

Consequently, he and his colleagues are being more deliberate.

With a large operation and people spread out in multiple locations, Aiken said, it’s imperative to have people on the ground who are familiar with the company’s vision. Every outside operation has either a “stakeholder” who is a local and was trained for at least a month in Colorado, or a manager who was trained in Colorado then relocated to that location to maintain Sweet Leaf’s culture and training standards.

In the early days, by contrast, Sweet Leaf’s owners moved swiftly and did whatever they could to expand the company’s footprint. When they first started, a lease might be one page – now it’s 60 pages with input from several attorneys.

Even the name of the company wasn’t carefully mapped out. Sweet Leaf was the third store co-owners Johnson, Aiken and Sauro purchased. The first was called Higher Ground, the second, Herbal Wellness. For no particular reason other than liking the sound of it, they settled on the name Sweet Leaf and poured their energy into branding it.

“The brand developed with us as we grew,” West said. “We just kept developing the logo until it felt good to everyone.”

The company hired Hilife Cannabis Creative, a Denver marketing firm, “for helping shape our branding across the board,” she said.

Navigating the Regulatory Landscape

Opening stores in different states and municipalities has meant that Sweet Leaf executives have had to contend with different regulations and local ordinances. Staying compliant with the local rules is paramount.

West said Sweet Leaf executives have learned to be “super flexible and pay attention to the details. Every new state is a different set of hurdles.”

One way to stay flexible, Aiken said, is to be under contract for a property but not take outright possession until the due diligence has been completed.

For example, the company agreed to buy a dry cleaner in Portland but didn’t close on the deal until all the research was completed. The city’s environmental study came back and found that the dry cleaner wasn’t disposing of its byproduct properly, creating contamination issues. Sweet Leaf executives walked away from the purchase.

Hiccups can occur – even in Colorado, where company executives are familiar with the regulatory landscape. When Sweet Leaf applied last year for a license for its new Thornton rec store, local regulators dinged the company over a tax issue inherited from the previous owner.

Every application, in fact, has its own challenges. For example, Thornton officials wanted Sweet Leaf to engage more with the local community and encourage its employees to get involved. Regulators also wanted the company to create local job opportunities as well as draft a safety and security plan.

“Every place we’re applying has kind of upped the benchmark of where they want to be,” Aiken said. “You have to be willing to play in a world of uncertainty.”

To ensure the company stays atop regulations, the regulatory compliance duties are assigned to both West and an outside attorney. It’s their job to keep abreast of the laws.

“What they say overrules a business decision,” Aiken said of West and the attorney.

Lessons Learned

Sweet Leaf executives have sought to learn from the mistakes they’ve made – or those they’ve seen committed by others. The blunders have shaped their current approach to business.

Aiken and his colleagues do a lot of distressed asset purchases, for example, and looking back they should have been more thorough when investigating a store’s condition and location.

In one instance, the company ended up selling a Denver outlet it had purchased as part of a three-store deal. West said it was on the end of a street with no traffic, had a tiny grow space and offered only on-street parking. Plus, the upkeep was pricey. A problem with the air conditioning, for instance, would eat up profits for the entire month.

That specific location would likely be profitable for a single-store operation, West said. But it didn’t work with Sweet Leaf’s retail chain model.

That kind of experience also taught executives the importance of saying no.

“You can turn down deals,” Aiken said, citing that as one of the biggest lessons he’s learned. “Saying no is a weapon. You don’t have to take every deal just because.”

Previous work experiences also have shaped the Sweet Leaf executives’ expansion plans. Aiken, for example, worked for other marijuana businesses before founding Sweet Leaf. He learned what other firms did well – and not so well.

Aiken said he saw business owners with “not a lot of urgency.” The employers, for example, didn’t want to work on the weekends.

“This is our life,” he added. “You’ve got to work hard every day.”

West said one of the largest problems she’s seen in her years in the industry is the lack of a clearly communicated vision. In the last five years, she estimates, she’s seen 20 growers fired because their vision didn’t mesh with the company’s. So West has learned to communicate exactly what she needs from a worker.

“We learned not to expect greatness without giving them the ability to know what greatness is,” West said.

Which gets back to Sweet Leaf’s mission: “Dominate Today, Get Better Tomorrow.”