The lootings and robberies that inflicted millions of dollars in damage on marijuana companies nationwide in May and June might have been the last straw for a storied cannabis business in Oakland, California.
Magnolia Wellness, an 11-year staple of the California marijuana industry and legalization movement, has an uncertain future because of a years-old pile of debt, one of the store’s owners disclosed this week.
But Salinas-based Grupo Flor, a vertically integrated cannabis company that already runs the retail shop East of Eden, is stepping in as a savior to try to right the ship under a new management agreement with Magnolia’s owners.
That’s giving Magnolia a glimmer of hope as it heads into 2021.
The preexisting debt situation “pretty much tanked Magnolia” when the store was looted over the summer, Magnolia co-owner Steve Podell said.
“It’s kind of a miracle that Magnolia has made it this long,” Podell said.
Magnolia was among dozens of cannabis retailers in California and other states that were targeted by organized gangs.
And, like many other businesses, Magnolia is still recovering from the looting while its fate hangs in the balance, Podell said.
“In general, everybody is struggling to recover right now,” he said. “Nobody received aid from the city or the state, and so there are quite a few businesses in Oakland that I know that are struggling.”
The situation is yet another indicator of how fragile the legal California cannabis industry remains, given the nearly nonexistent profit margins, heavy compliance costs, lack of governmental support, extreme competition from the illicit market and – to top things off – a rash of robberies in 2020 that hobbled many businesses.
Magnolia, for instance, was looted twice in May and June.
In a last-ditch effort to save Magnolia, company management decided to get some help from Grupo Flor, a move that has Podell among those optimistic about the shop’s chances for survival.
The company is taking over Magnolia’s operations in the hopes of ramping up revenue and settling much of the company’s debts.
But if the situation can’t be salvaged within six months to a year, then it’s likely the shop will close and the company dissolved, Podell, who is also Grupo Flor’s chief financial officer, confirmed to Marijuana Business Daily.
The last straw?
Podell said that when his partner, Debby Goldsberry, took over management of Magnolia in 2015, the business was already laden with heavy debts, including unpaid government taxes that Podell said account for the largest chunk of the company’s outstanding bills.
“Magnolia is carrying more debt than a business operating efficiently should and is currently working with debtors that have been very gracious and willing to work with Magnolia to allow (the business) to survive,” Podell said.
Podell and Goldsberry were able to convince Grupo Flor to step in, at least temporarily, under a management-services contract.
That means Grupo Flor will be resupplying the shop with inventory and running day-to-day operations for the foreseeable future, said Grupo Flor CEO Gavin Kogan.
“The goal was, how could we preserve the shop?” Kogan said. “It’s our hope that at some point down the road we’ll be in a position to acquire Magnolia and take the next step.
“But right now, that’s not realistic. Right now, it’s just, let’s get the shop up and running.”
Kogan said the store likely will open sometime next week, but, like Podell, he is circumspect about the situation.
They’re giving the Magnolia revamp a timeline of six months to a year to pay off as many creditors as possible and get revenues on the rebound.
But if the financial situation hasn’t turned around in that time frame, the legacy shop might be closed for good.
“It’s not a long-term arrangement,” Kogan said. “For Grupo Flor, Magnolia has to get on its feet and manage through its creditors, and if we can’t resuscitate the company and creditors aren’t willing to work alongside it, then it might make sense just to shut the whole thing down and be done.”
Other issues
News began circulating in industry circles of Grupo Flor’s new role in part because the company found it necessary to formally lay off all former Magnolia employees and then invite them to reapply for their jobs.
That was mainly because the shop had been closed since June and many of the staffers had moved on to find employment elsewhere, Kogan said.
“One of the cleanups was … everyone can reapply and we can start over,” Kogan said. “It’s not continuity. Everything had to be scrubbed and restarted.”
But that didn’t satisfy the local United Food and Commercial Workers Union (UFCW), which has represented Magnolia staffers for eight years.
“We will fight to ensure that whoever manages Magnolia Wellness honors the contract that workers have had since 2012,” said Jim Araby, spokesman for UFCW Local 5.
Araby said that he found out about the new management agreement via a post on a popular industry Facebook page, not directly from Magnolia’s management.
Though Araby is “hopeful” an agreement will be reached between the UFCW and Grupo Flor, he added: “To find out about this on Facebook is utter disregard for the law, and we will pursue all avenues possible to ensure these workers are made whole.”
In addition, Magnolia and Goldsberry are facing at least one lawsuit from creditors, including Oakland-based Eureka Management Services, which alleges breach of contract and other misdeeds.
The lawsuit asserts that in 2015 Magnolia had at least $1.5 million in outstanding debts.
Regarding that suit, Podell said the complaint is filled with “inaccuracies” and that Magnolia will be issuing a response by the end of the month.
On the edge
Though Podell said comparing Magnolia’s situation to other California marijuana businesses isn’t “apples to apples” because the store was saddled with a heap of preexisting debt before the transition to the new regulated market in 2018, he’s optimistic Grupo Flor can right the ship.
Podell added that the most frustrating aspect of the situation is the disparity between how much in taxes cannabis companies pay cities such as Oakland and how little support they’ve received through 2020 – all the while operating as “essential” businesses during the coronavirus pandemic and receiving almost no police response to the lootings that nearly bankrupted Magnolia.
He’s “excited” about the prospect of Magnolia turning the corner with Grupo Flor’s help.
“I’m extremely confident in the management team at Grupo Flor. They’re very good operators with retail, and they’ve proven it out in Salinas,” Podell said.
“The part that makes me nervous is the ability to reduce the debt to make this a viable business,” he added. “If we can’t reduce the debt quick enough, then it just doesn’t work financially.
“That’s the part that worries me the most.”
John Schroyer can be reached at johns@mjbizdaily.com
