Organigram is among a handful of large Canadian cannabis producers that managed to take more overall share of Canada’s cannabis market in 2021 via nondilutive organic sales growth.
How did the Moncton, New Brunswick-based licensed producer do it?
“We believe you have to be able to meet consumers at every price point. And there’s a lot of consumers who are interested in buying their highest-THC products at the right price point that they’re looking for,” Organigram CEO Beena Goldenberg told MJBizDaily in a phone interview.
“I think our competitors have shied away from (low-cost, high-volume sales) because if your cost structure isn’t right, and you can’t make money at it, it’s a lot of work for nothing.”
Organigram isn’t profitable yet, but that is expected to change in the coming months.
This week, the company signaled it will turn a profit by the middle of 2022, three months earlier than previously expected, with an assist from its recent purchase of cannabis producer Laurentian Organic.
MJBizDaily spoke with Goldenberg about a range of topics, including her recent foray into the M&A market to purchase Quebec producer Laurentian in a deal worth at least 36 million Canadian dollars ($27.8 million).
Why did you buy Laurentian Organic?
We’re very interested in having a presence in Quebec. We know how the (Société québécoise du cannabis) operates. They’re looking for at least 50% of their products on-shelf coming from Quebec.
Consistent with our M&A strategy, we’re looking to fill gaps in our portfolio. We’re not looking to duplicate what we currently have.
When we looked at Laurentian, their focus was in two areas: craft flower, which we currently don’t have in our portfolio – they do that under their Laurentian brand – and their entry into concentrates, with their Afghan Kush.
Both of these were important gaps in our portfolio.
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It’s a business that is accretive on both revenue and EBITDA.
Net revenue of CA$17 million, using the last couple of months run rate, and EBITDA of CA$6 million, so it’s something that will help us get to EBITDA profitability sooner.
How do you integrate Laurentian Organic into your portfolio without losing what made that company successful in the first place?
It’s very important in terms of maintaining what they currently have and building upon it.
We’re investing CA$7 million in their facility to build it out, to increase the capacity.
We have a team of engineers who have gone out there to take a look at their processes and how to automate (them), how to get more efficiency.
Where we believe Organigram can help is in taking the business, expanding the distribution further in Canada.
The second part of the integration is: They are currently buying their trim and buying their distillate and we could supply it out of our facility.
What about the people?
We certainly have the key people sticking around for the time being.
Hopefully we have the people on the floor, who are the experts on the product, sticking around for longer, because they’re the secret sauce on how we’re making the product.
The founders have a two-year earnout.
They will be around for sure over the course of those two years to make sure the business is as successful. They win, along with Organigram, the more successful this is.
Can value products such as Shred be profitable?
They can be profitable. You have to have the overhead structure and the automation in your facility.
Because if you can’t, then you’re right, that’s why several of our competitors had to walk away.
We have spent a lot of time driving efficiencies in our operations, so that we can sell at these more compressed prices and still make money and still have a positive margin.
If you can make some money on it, even if it’s a small margin, when you have a lot of volume, it’s significant.
How is it that a small company such as Laurentian is more profitable than any large cannabis producer?
Here’s the difference: They built a facility that was 6,800 square feet and produced products they could sell at a premium.
The challenge with the large LPs is they built facilities that … come with lots of overhead, lots of costs, lots of depreciation.
To build out those kinds of structures, you need to put a lot of people in place. As a result, you need a lot of tonnage to run through the facility to become profitable.
So I think the smaller micro and craft guys could get to profitability sooner, but they can’t be successful in rolling out expansion across Canada and meeting that demand.
In mature businesses, you don’t build the infrastructure for a $200 million business when you’re just starting out. You build as you go.
Correct me if I’m wrong, but some large producers did it backward. They built their large facilities before they had proven out their models.
That’s right. And that’s why they’re all unprofitable.
You have all this overhead and cost to run those very large facilities, and if you don’t have them pumping out a ton of volume (sales), the costs are just too high.
It’s about getting your processes, putting automation in and driving costs out of your infrastructure, where you can, so that you could make money, even on that value segment.
After that, it’s gravy.
Organigram struck a CA$220 million strategic collaboration with British American Tobacco (BAT) in early 2021. What do you say to critics who say it’s unethical to partner with a tobacco company?
I think we’re focused on an area that we believe is in the health and wellness space.
The product-development collaboration we have with BAT, which primarily is focused on CBD, is also focused on new technologies and new IP.
This is an opportunity to get ahead of the curve and capitalize once those (new international) markets materialize.
We’re going to be doing all the right safety and efficacy testing required to bring great products to the market.
Is excise-tax reform needed as part of Canada’s upcoming review of the federal Cannabis Act?
I think it’s badly needed. We don’t have a healthy industry right now, because very few are profitable, because the excise tax is really challenging.
There’s two parts to excise-tax reform.
The first, which I think should be easier to accomplish, is that we need one excise stamp across the country.
We’ve added a tremendous amount of complexity to every LP, because you have to have a different excise tax stamp for each province.
The second is that you’re taxed based on your tonnage and not based on the price point. If you were taxed based on the retail sales price, then there would be a way for the LPs to be more profitable.
The government makes a lot of money, and the LP doesn’t make very much money.
This interview has been edited for length and clarity.
Matt Lamers can be reached at firstname.lastname@example.org.