(This story is part of the cover package in the September issue of MJBizMagazine.)
In Colorado, the 10 biggest marijuana businesses account for more than 70% of cannabis sales, according to MJ consultant Chris Cox.
The same will eventually be true in California, where the top 10 companies account for more than 30% of marijuana sales, says Cox, a partner with Sacramento-based cannabis consultancy BeGreenLegal.
With statistics such as these, small cannabis businesses might find it challenging to gain market share. But experienced business owners know there are ways to get ahead and improve chances for success.
Following are 10 strategies cannabis executives recommend to keep costs low and margins high.
1. Smarter inventory tracking, management
A common mistake small marijuana businesses make is carrying too many products or stock-keeping units (SKUs). Many eventually reduce the number of SKUs they carry, but some SKU reductions help the bottom line more than others do.
Hope Wiseman, CEO of Mary & Main, a dispensary she launched in 2018 in Prince Georges County, Maryland, said the first step to better inventory management is paying closer attention to key performance indicators, or KPIs.
Monitoring KPIs can help reveal which products are driving the business and which are not. For example, the KPIs revealed that when Maryland’s marijuana market plateaued, loyal clientele kept coming back to Wiseman’s store.
“We see the same people, and we know what they like,” Wiseman observed. “It’s about getting smarter with the types of products and really leaning into our patients.”
Equipped with that data, she decided to reduce the number of SKUs that Mary & Main carried, cutting the least popular items and maintaining products that loyal customers purchased most frequently.
“We just honed in on things that had more bang for your buck. We focused less on getting top brands and focused more on getting value into the store,” Wiseman said. “We want to have a variety, but we don’t want to stock things that are taking more than two to three weeks to move. … We cut anything that we could not prove was making us money.”
Peggy Moore, CEO of Love’s Oven, took the same approach at her Denver edibles business. The company conducted “SKU rationalizations” every six months but has since started doing them every month.
Love’s Oven also developed a survey for the retail stores it sold to, to dig deeper and find out what kinds of products they wanted.
“Maybe it’s less about lowering prices on this product or that product and (more about) seeing if there’s some other variation on a product that we can do that’s less expensive, that the retailers think would really help them improve sales,” Moore said. “Because we’ve been at this a pretty long time, we can have an edible developed in pretty short order.”
David Cichocki, co-founder of Pioneer Valley Extracts in Florence, Massachusetts, did something similar. When flower prices started dramatically dropping from $4,000 per pound a couple of years ago to $3,000 per pound and lower, the extraction and manufacturing company saw the margins drop on its packs of dried flower pre-rolls. Extraction and manufactured products such as infused pre-rolls and edibles, meanwhile, are still doing well.
“We’re thinking about discontinuing (the items that have slim or no profit margins) so we can focus on our extracted and manufactured products that have higher margins,” Cichocki explained. “Extraction is where we have our competitive advantage. We can buy the biomass cheaper and turn that into craft concentrates and vape products. That’s where we see a benefit from the downward pricing.”
2. Pricing and discounts
When outside economic factors such as inflation or a recession cause consumers to tighten their spending, many businesses will automatically lower prices in hopes of keeping money coming in. But cutting prices isn’t always the best action in those circumstances, according to some marijuana executives—and if they are to be cut, they should be cut strategically.
For example, Wiseman said the drop in Maryland’s flower prices has allowed her to offer discounts on flower, but she is compensating by offering fewer discounts on other products. Premium flower prices have dropped in Maryland from about $4,000 per pound to around $3,000 per pound, while popcorn buds sell for about $2,000 per pound.
“As an independent retailer, it’s difficult to offer a really steep discount if you’re not getting the product at a decent rate. And you can’t control the wholesale market,” Wiseman said.
Buying popcorn buds that appealed to value-conscious flower consumers “allowed us to get better discounts, and so we can offer better pricing and also make sure that we’re getting a margin there.”
She also realized Mary & Main was offering too many discounts and cut back.
“We didn’t realize how much money we were giving away every year,” Wiseman said. So, she changed her strategy to offer fewer discounts, cut discounts on some items and give deeper discounts on others.
“It’s really helped us survive,” she said. “We just got smarter with inventory and cut all the fat from our expenses.”
3. Partner with another small business
Sometimes the best way to survive as a small business is to work with another small business. Calvin Akers and his partner, James Dube, each launched cannabis careers in Maine’s caregiver market about eight years ago.
After meeting through mutual acquaintances, they realized they had complementary skill sets and decided to partner: Akers was a regulatory and marketing expert; Dube was a cultivation and extraction guru.
“It was a combination of watching the industry grow and knowing that if we wanted to grow, too, it would be easier to do as part of a team rather than solo,” Akers said.
But under Maine’s complicated rules, the two can’t operate as a single business. Their grows are under one roof but in separate rooms; the retail store is licensed under Akers, while the processing facility where they make solventless hash and other solventless products is under a separate manufacturing license.
Akers said it took about three years to work through the zoning, ordinances and licensing. The result was Wisely Cannabis, a vertically integrated medical marijuana business.
But Akers and Dube aren’t done. The town they are in, Sanford, Maine, opted in to allow adult-use businesses, and now the two are preparing to make the leap into that market.
At the same time, Wiseley’s solventless products have caught the attention of some out-of-state cannabis businesses, so the partners are now working on licensing deals that will generate income and broaden their brand name.
4. Stand out with branding
Akers and Dube knew that if they wanted their small business to compete in an increasingly crowded market, they would need to somehow distinguish themselves.
“We realized that quality in anything is going to make you stand out over quantity,” Akers said. They also realized that the best way to leverage that quality wouldn’t be in flower, since there were already many cultivators in the state. Rather, it would have to be through another high-quality product.
The partners first looked into edibles but saw a cost-intensive endeavor in an increasingly crowded market. Then, in 2018, they heard about rosin, which was just emerging as a product category.
“We decided that we needed to pick a lane, and we went with solventless (concentrates),” Akers said. That decision led to hash production and, later, solventless concentrate-infused edibles.
“It was not a simple transition because we took a lot of losses learning,” Akers said. But once they finalized their hash and rosin recipes, “the path couldn’t be any clearer.”
“Licensed companies from other states want to bring Wisely into their states, and we are exploring that,” he said.
Matt Walstatter, co-founder and CEO of Siren Cannabis in Portland, Oregon, a cultivation business that recently scaled from 4,000 square feet of grow space to 8,000 square feet, concurs.
In oversaturated markets such as Oregon, “You can’t differentiate yourself just by the quality of your product, because there are too many people growing good enough stuff to compete. … You have to create a strong brand.”
Walstatter and his wife, Megan, came up with the name and logo themselves; then they put it on merchandise such as hoodies and T-shirts to build name recognition.
“We wanted something cool,” Walstatter said of the logo and merchandise. “But it’s also the kind of thing that you can wear to a PTA meeting.” Much of the clothing features an illustration of an eye surrounded by sunrays and phrases such as “inner vision” and “summon your vision.”
5. Pay employees a decent wage
Inflation not only hurts consumers, but it also hurts your company’s workers. At the same time, employee turnover is a big expense that is even harder for small businesses to absorb.
For Ulysses Youngblood, owner of the Major Bloom dispensary in Worcester, Massachusetts, the solution to that problem is to pay employees above-average starting wages for the region and the industry.
Youngblood estimates that most cannabis businesses in his region offer a starting wage of $16-$17 per hour for budtenders and delivery drivers, so he said he pays $19 per hour to start.
“That’s very intentional,” Youngblood told MJBizMagazine. “We want to pay really good wages so we have a really good environment.
“Finding new employees—hiring and training them—is something that slows us down. … The few dollars an hour that we invest into these employees day in and day out, we actually think saves us not just financially but in stress and headaches, because we’re able to retain them.”
6. Step up the customer relationship
Cannabis business owners work hard to gain customers, but they need to sharpen their customer-relationship management, or CRM, skills to retain them.
“Everyone knows that it costs more to get a new customer than it does to keep the same ones happy,” Wiseman said.
In Mary & Main’s case, that means more phone calls, texts and other outreach to customers—but also more targeted outreach.
“We follow up with phone calls based on how long (since) you’ve been in the store and your last purchase. If there’s a product that we know you’re constantly buying and we just restocked it, we’ll call or text you. There’s a lot of personalization in there and trying to connect with people where they want to be met,” Wiseman said. “When you send blanket texts to people, they are less responsive, and some even unsubscribe. Dig deeper to figure out what people want and then send personalized messages. That has a good ROI.”
7. Community connections
While it’s vital to manage customer relationships, it’s also critical that small cannabis business owners connect with the communities they are in. When Youngblood opened his marijuana store, in a years-vacant storefront in a lower income neighborhood in Worcester, he knew it would be welcomed.
“You offer a level of security when you bring economic activity to a low-income neighborhood. We’re definitely doing our part to revitalize this location and this neighborhood,” he said.
But to maintain that welcome, Youngblood started sponsoring events at local venues where artists exhibit their work. “That increases our traffic,” he said.
To commemorate the one-year anniversary of Major Bloom, Youngblood is planning a celebration to thank the community that welcomed his business. “I’m excited about events, because that’s how you can bring people in.”
8. Vendor relationships
Because small cannabis businesses can’t leverage economies of scale the way larger operators can when buying inventory or supplies, they must find other ways to lower costs.
One way is to seek new vendors. For example, Denver-based edibles maker Love’s Oven almost exclusively used food wholesalers Sysco and Shamrock Foods Distribution & Food Supply to buy ingredients. But when inflation and supply-chain issues pushed prices at those companies up, Love’s Oven CEO Moore was compelled to find better deals elsewhere.
“We are using those vendors but less (frequently) because they are not always the best price—and they’re not always on time with their deliveries. So we’re forced to go to other options when it comes to ingredients. Same with packaging, although those prices haven’t fluctuated as much as food prices,” Moore said.
Major Bloom’s Youngblood keeps his costs down by buying flower in bulk—often 10 pounds at a time of a particular strain—and eliminating certain frills.
“When other people buy weed, they buy it prepackaged, and that drivers up the costs. We buy it in turkey bags, handpick the nugs we want to sell and package them in a jar,” Youngblood said. “When you buy weed at 10 pounds in bulk, then it’s ultimately saving money for us and saving time for the cultivators because they don’t have to package it.”
Pioneer Valley Extracts’ Cichocki also has responded to rising supply prices with bulk buying. Pioneer Valley feels the biggest squeeze in packaging prices, which Cichocki believes have increased by about 20%.
Now, “if we were ordering 20,000 boxes, we go to 40,000 boxes” to “keep the price down,” he said.
Another way to reduce supply costs is to team up with other businesses to buy larger amounts and create economies of scale.
Christine De La Rosa, co-founder of The People’s Ecosystem, a cannabis company based in Oakland, California, created a “buyers club” made up of several businesses that work together to purchase flower in larger amounts—say 50 pounds at a time instead of 10 pounds.
Buying in bulk means companies in the buyers club get lower costs per pound as well as lower testing costs.
“There is a huge value in buying collectively,” De La Rosa told the MJBiz podcast “Seed to CEO.” “We needed to combine all of the folks that we could to buy together, sell together, share salespeople, because we are not MSOs, we are a smaller company.”
9. Sales team with ears to the ground
Your sales force is meant to sell, not interview. But because they are in regular contact with budtenders and inventory managers, wholesale sales associates should get in the habit of mining clients for information.
For example, the sales team at Love’s Oven heard from retailers that they couldn’t buy new products until they had finished selling other companies’ inventory. When CEO Moore heard that, she decided the solution was to buy competitors’ inventory to make room on retail shelves for Love’s Oven products.
“Our sales team has been instrumental in having their ear to the ground, hearing what retailers need or are interested in, and then telling us about it,” Moore said.
In January, budtenders at Winewood Organics, a vertically integrated microbusiness in Ann Arbor, Michigan, noticed that customers were asking for bubble hash. Surprised, Winewood CEO Eric Parkhurst checked Weedmaps and saw that none of the nearly 30 dispensaries in the area were offering the product. Winewood moved immediately to take advantage of the opportunity and had bubble hash on the shelves in about two weeks.
“All of the other shops were forced to send people up here for bubble hash,” Parkhurst recalled. “That helps a lot, people just telling us what they want.”
10. Contingency planning
When Siren Cannabis’ Walstatter raises money to expand his cultivation business in Oregon, he tells investors he will need more than the original cost projections. Why? Because there are always delays, unexpected problems and, now, inflation. The latter is driving construction prices up by 30% or more.
For example, Walstatter’s pre-coronavirus bid to expand Siren’s cultivation facility from 4,000 square feet to 8,000 square feet went up by roughly $100,000 after the project started during the pandemic, which drove up construction costs.
Luckily, Walstatter included contingencies in the budget, which ended up saving his business.
“Between the contingency money that I raised as part of my fundraising and then the savings that I had put aside … we didn’t ever run out of money,” he said, adding that further construction delays could have changed the outcome significantly.
How does Walstatter factor contingency planning?
For starters, he adds 20%-25% to what he believes a project is going to cost, adding extra line items for contingencies.
Another factor to consider during build-outs are “carry costs,” because the revenue from a build-out won’t be seen for around four months.
“Let’s say you’re done building, but you’re still six months from cash flow. You have to grow the plants, and the whole time you’re paying rent, power, labor. So, I estimate the monthly carry costs of the additional cultivation capacity. And I put that as a line item in my pro forma,” Walstatter explained. “I estimated how much additional power, labor, fertilizer and everything else I was going to need. So, in addition to my construction costs, my equipment costs, legal costs, I’ve got a line item for carry costs, which are all those monthly expenses, roughly, until we start cash flowing.”