Cannabis industry veterans share measures they’ve taken to keep their companies viable amid the current downturn

(Several cannabis industry executives discuss steps that companies can take to survive the current recession.)

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The COVID-inflicted recession is unlike any the U.S. economy has experienced since the Great Depression.

The economy shrank at a record 32.9% annual rate in the second quarter.

The free fall represents a threat to the existence of many marijuana businesses. When and how it ends is far from clear.

Marijuana has so far proved relatively recession-resistant.

Whether that continues depends on many factors beyond the control of cannabis companies.

Among them is any new relief package Congress and the White House ultimately agree on – although the marijuana industry is likely to be excluded from any direct financial help.

In the meantime, marijuana industry executives can take several steps to keep their companies afloat.

To that end, six executives share with the actions they’ve taken to keep their companies strong.

Ted Whitney

Chief operating officer of Nug

Alameda, California

 

How did you decide what to cut and keep?

Going through that exercise, we’re saying: What’s a nice to have? What’s a need to have? Can we push some of these spends out? Can we have them triggered when we hit a certain revenue target? What’s critical to completing our plan for the year?

There were times when we said: 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 that goes to completion. Other things can get shelved until later on when we have more bandwidth.

What were some of the main cuts?

We’ve got some retail units that we are rolling out slowly, and we are trying to offload some licenses.

Splitting a license with an operator has been a really successful way for us to get down the cost of opening up a new store. Having a partner on a license takes some financial pressure off, and having a partner who is local helps tie the business into the local community.

Have you been able to leverage good relationships?

With one company we have a tight partnership with, 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 to them.

We can get 30- or 60-day terms in some cases. They’ve been really good about helping us get biomass on terms that work with our business model, and we get them pricing that works for theirs. We might pay more than the best deal, but it’s worth it for us because it’s not putting us into a cash-flow crunch.

Are you noticing demand for lower-priced products?

We’ve got a value-priced line under the Erb brand name that just came out. We buy smalls (smaller, lower-priced flower nuggets) from different growers around California and pass on that value to customers. Those are used for 0.6-gram pre-rolls.

We’ve definitely seen migration toward 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.

How has Nug coped with layoffs?

You 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, filling vape carts. People who do it regularly can do 500 per hour; the new ones are getting about 75 to 80 per hour. But with training, they can come close to 500 per hour.

Erich Mauff

President of Jushi

Boca Raton, Florida

 

How have you adjusted your expansion plans?

Expansion plans have been affected by COVID-19. We’ve had to de-emphasize in California.

Because of COVID-19 and the new situation we are in, we believe there are new opportunities that make more sense.

It’s markets like Illinois, Pennsylvania and Virginia. The demand for our product in all these states is high, so the responsible thing for me as a company owner is to continue to build my footprint in areas where people have no access.

What do you expect the capital-raising climate to be like?

I think it’s going to be harder for cannabis companies to raise capital. Pre-coronavirus, we could entice investors into our stock by doing debt deals with coupons at 10%-14%. There are lots of people now paying double-digit coupons to keep airlines and restaurant chains open. The risk premium the market has been willing to pay has gone up, which has impacted us, because now we’re not paying 10%. Now people want us to pay 20%.

Because many investors have lost money on poorly managed cannabis companies headed toward bankruptcy, investors are most cautious. I am very concerned about the liquidity available to the cannabis industry over the remainder of 2020.

Have you had to make cuts?

Absolutely. We’ve laid off people to streamline the organization. We’ve had to give up on certain endeavors that we were doing. The majority of the job cuts are in GNA (general corporate and administration). We’re not as actively doing M&A, so we can get rid of some of those people.

Kim Rael

CEO of Azuca

New York City

 

Has Azuca changed its strategies relating to THC and hemp-derived CBD products?

When COVID hit us, we assessed our business portfolio, and it was very clear that our most capital-efficient business is our licensing business in the THC world.

So our pivot has been to double down with our THC partners and expand our THC license initiative.

On the CBD side, because we have a manufacturing operation and IT, sales and marketing, we did reduce our spending for now in those channels while the retail sector settles down.

Have you had to cut research and development?

I don’t like to cut R&D but invest in it. That partly comes from having worked at Intel for seven years where the mantra was to invest in technology in down times.

We’re really doubling down on business development in the timed-release channel right now. It’s pretty capital efficient, and there’s a real appetite for innovation in edibles.

We’re continuing to fill the internal pipeline of next-generation innovations on the product side.

Have your expansion plans changed?

We are aggressively looking at new markets, so we haven’t changed our business development strategies because of COVID-19.

Austin Stevenson

Chief innovation officer of Vertosa

Oakland, California

 

How has Vertosa reduced costs?

Oil has a long shelf life and there is an oversupply of oil on the market, reducing the costs. The looming recessionary fear has caused the cost of extracts to go down even more.

Being a company that uses those extracts has allowed us to look at our inventory and purchase a lot of extracts at discount.

We have inventory to sustain us; we’ve planned three, six and 12 months, where you’ve been able to procure inputs and hold them and then actually – because of the lower cost – you are able to sell formulations with a higher margin than in pre-recessionary times.

Do you have a system for forecasting such long-term inventory needs?

When there is looming economic uncertainty, one of the first things we do is review our inventory. Then, we create an inventory-management plan directly aligned with our revenue and sales forecast. We first look at our core customers and ask them: What’s your production schedule over the next 30, 60, 90 days? We make sure to secure inventory for that pipeline of business first.

Second, we look at what new projects we are taking on in 30, 60, 90 days and then three months, six months and 12 months. Based on our close-rate data, we ask: If we meet or exceed that close rate, how much inventory will we need? And then we make sure to procure enough for that amount.

The third step for inventory is R&D. What projects are you working on internally? What products do we want to release in that same time period? Then we make sure we have enough inventory for that piece.

Then there’s a buffer: 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.

Do you use any metrics or indicators to see whether those input prices will go up or down?

It’s a commodities game and checking spot indices.

Our procurement manager has a running list of extractors in all markets that we serve.

We first look at their price lists and watch those on a monthly recurring basis. And if we start to see, one, prices start to erode on a month-over-month basis, obviously prices are going down.

Other indicators include increases in bulk-sales activities. I subscribe to every single extractor we’ve worked with plus others that we haven’t, and I have seen, in the last month or so, what was a 10% discount has increased to a 20% discount, 50% discount. And volume requirements to get those discounts has dropped.

So, what pre-recession was like a 10% discount for 5 liters of distillate now is a 25% discount for 2 liters of distillate.

Discounting practices by extractors, to me, is the biggest indicator that we need to move inventory, that a recession is happening.

Jen Drake

Chief operating officer of Ayr Strategies

New York City

 

How do you control costs?

The key for us as a business is the preparation beforehand (and) being a very disciplined allocator of capital in terms of return on the investments that you make. We have the technology and digital infrastructure to run our business very efficiently.

We also have expanded our cultivation capacity. That puts us in what we think is really the right size. You don’t want to be too small, but you also don’t want to be so big or so overly complex in your operations or your infrastructure that you aren’t getting a good return on your investment.

What metrics do you use when trying to determine what a good size is?

We want to be in a position where we can be a good supplier of our own demand. In Nevada, our demand comes from our very productive retail stores throughout the state. So, we think about supplying our own demand that way.

What role do market trends play in strategy-making?

We look at the market both qualitatively and quantitatively for changing trends so that we can try to be on top of product enhancements or slight changes to product, whether it’s form factor changes or formulation changes.

I wouldn’t say we’re doing anything different in response to the recession. I think we’re just following that same discipline that we always have, which is looking at the data, looking at the market both qualitatively and quantitatively in terms of where it’s going, as a way to provide an excellent customer experience.

Tye Heckler

Founder and president of Heckler Branding

Seattle

 

What’s the key to good branding in bad times?

This is a great opportunity to strengthen the personal bond with your existing customer base. It’s a great opportunity to reach out to people on a personal level and remind them why the brand is important to them and why it should be part of their daily lives.

Now is the time to nurture the relationship with who you already have a relationship with. Don’t be scrambling to get new customers.

You have an excuse to step back, reach out to your existing customers in a way that you haven’t done it before. Maybe it’s a special offer. Maybe it’s a new continuity program that rewards them for being a regular customer.

Can a recession be a good time for a business to change its brand or its name?

A name change is a great opportunity to talk about yourself. You have an excuse as a company to talk about yourself without sounding like you’re bragging, because you have to tell them, “Hey, we’ve changed our name to X because of XYZ.”

It is a time to reinforce your brand’s attributes and your values as a company.

In tough times, are there tones or messages that work better than others?

It’s important to do something to acknowledge the fact that things are different right now. And if you don’t address anything, then you end up looking irrelevant, like you’re not involved.

You’re not preaching to the new person. You’re communicating to your existing customer base in a respectful fashion, showing your appreciation and then also reminding them why you’re special and why they need to remain an existing customer.

Then, address the future. Give them some insights on what you’re planning to do for the future and what your goals are. Show that you’re not stagnant.

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