Green Thumb CEO Ben Kovler explains why his marijuana MSO is in the black

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Image of Ben Kovler

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When Ben Kovler can’t sleep, it’s a sign that something’s wrong.

In 2015, for example, after the Chicago-based marijuana multistate operator won three of the 20 medical cannabis cultivation licenses up for grabs in Illinois, the founder and CEO of Green Thumb Industries couldn’t sleep.

The former math teacher and private equity executive thought that the company was biting off more than it could chew, and he wasn’t sure Green Thumb had the money to build out three facilities.

So Kovler decided to give back one of the licenses, he told MJBizDaily in an interview.

“I’m big into listening to my sleep as a guide for how to operate,” Kovler added, before plugging his company’s Snoozzzeberry product, a marijuana edible designed to help users get a good night’s rest.

Those instincts have been key to Green Thumb’s success in the 14 markets in which it’s now operating.

Unlike just about all its competitors, the company is profitable, reporting net income of $12 million, or 5 cents a share, for all of 2022.

For the first quarter of 2023, as its fellow MSOs announced layoffs and shuttered production facilities and retail outlets, Green Thumb’s revenue declined by 4.2% from the previous quarter to $248.5 million.

But the company reported $75 million in free cash flow from operations and net income of $9 million.

In a May 3 email to subscribers, Matt Bottomley, Toronto-based equity research analyst at investment banking and financial services company Canaccord Genuity, said Green Thumb has an “industry-leading profitability profile amongst US Multi-State Operators.”

There’s no shortage to the problems facing the cannabis industry: Meaningful federal marijuana reform isn’t on the horizon, and price compression, inflation, high interest rates and taxes are punishing.

But Green Thumb is proving to be sustainable despite the fierce headwinds battering the marijuana industry.

“Savvy investors understand that only stable and profitable companies will likely survive this intense competition,” equity research analyst Sushree Mohanty wrote for investor blog Motley Fool in May.

“One of them could be Green Thumb Industries.”

So how have Kovler and his team achieved that so far?

By reining in spending and avoiding expensive, problem-laden mergers and acquisitions as well as creating authentic relationships with its customers and recognizing the pitfalls of focusing on earnings before interest, taxes, depreciation and amortization (EBITDA) in a federally illegal business, Kovler told MJBizDaily.

Prohibition 2.0

Kovler, who has historic ties to the Jim Beam bourbon whiskey empire, watched the marijuana industry’s early days from the sidelines; voting for Proposition 215, the 1996 measure that legalized medical cannabis in California; and observing the burgeoning sector in Colorado, where his wife hails from.

When his home state of Illinois passed medical marijuana laws, he officially founded Green Thumb in 2014.

“One of my favorite quotes is from Mark Twain, which is, ‘History doesn’t repeat itself. It rhymes,'” Kovler said, referring to the current era as Prohibition 2.0.

Just like moonshine and bathtub gin became successful brands such as Jim Beam and Seagram’s, “so, too, weed in a baggie becomes Rythm,” Kovler said, referencing a Green Thumb brand.

Kovler would know. His great-grandfather operated Jim Beam for 30 years before selling the brand in the 1960s.

Kovler brought the Prohibition 2.0 pitch to investors, first in Illinois, then in Maryland.

Andy Grossman, Green Thumb’s head of capital markets and investor relations, remembers hearing the company’s pitch to investors for the first time when it was applying for licenses in Maryland.

Grossman, who had just left a 20-year hedge fund career, invested in Green Thumb and spent the next eight months assessing the rest of the cannabis industry landscape for more opportunities.

But he wasn’t confident other operators had the same handle on the industry as Green Thumb, with its plan to take what it had learned so far in Illinois and expand to states with a limited number of licenses.

Before long, Grossman took a job with the company, helping to prepare the application for Pennsylvania’s medical cannabis market and take the company public on the Canadian Securities Exchange in 2018.

Staying lean

“Part of the attraction for me originally was working with Ben,” Grossman said.

“He is incredibly smart. He has a very strong handle on the numbers of the business.”

Grossman said investors, for example, have criticized the company for not expanding aggressively enough and taking on more debt.

As of March 31, the company’s total debt was $277.8 million.

But rather than doing transformational, blockbuster mergers and acquisitions, Kovler said he prefers to bootstrap growth.

“I can invest in my own businesses in a cheaper, more controlled situation than buying somebody else’s problems,” he said.

For example, Kovler said he could buy a cultivation facility for $10 million, or he could build his own for $3 million.

Also, he gains the advantage of understanding every aspect of the new build.

“There’s no mold behind the wall or employee issue or whatever all the problems are that come with M&A.”

And while other companies focused on EBITDA in the early years, Green Thumb recognized that because of Section 280E of the federal tax code, the company was paying income tax on gross margins – meaning income taxes would have a massive impact on the balance sheet.

“Uncle Sam is our largest financial partner, and we are a federal criminal,” Kovler said, referring to federal marijuana prohibition in the U.S. “It makes no sense.”

The company’s compensation packages are also some of the lowest in the industry, he said.

Kovler’s total compensation package was valued at $1.89 million in 2022, compared with $8.5 million for the CEO of Florida-based marijuana multistate operator Jushi Holdings and $3.9 million for the CEO of New York-based Acreage Holdings.

While Green Thumb brought in $1 billion in revenue in 2022, Jushi reported $284 million and Acreage $237 million.

That lean approach could be at the root of the company’s ongoing, difficult benefits and salary negotiations with the unions that are representing a growing number of its workers.

It has also been subject to a high number of unfair labor practices charges, most recently from Teamsters Local 777, which represents some of Green Thumb’s Rise retail workers.

The union accused Green Thumb executives of spying on its employees on the Discord online messaging platform; Green Thumb denies doing so.

“We certainly respect the rights of employees to organize and wish it was smoother,” Kovler said.

“Negotiations are hard to get into. But we want it to be resolved.”

Brand-building and capital markets

Despite the tough capital markets, Green Thumb won’t be following fellow MSO TerrAscend Corp. to the Toronto Stock Exchange, where that company hopes to tap into a larger pool of investors.

For now, Green Thumb will remain on the Canadian Securities Exchange (GTII) and over-the-counter markets (GTBIF), according to Grossman.

He said he doesn’t believe the costs and energy involved in restructuring the company to comply with TSX standards, as TerrAscend has done, would drive enough value for Green Thumb.

“I’m not so sure that just being listed on the TSX is going to drive additional capital into the industry,” he said.

When it comes to Green Thumb’s portfolio of brands, which includes Rythm, Dogwalkers and Incredibles, Kovler said his attitude hasn’t changed since the company was founded in 2014.

“Brands that create an authentic relationship with the consumer on honesty and trust is how to win,” Kovler said.

“That’s literally what I said in 2014, and it’s the same in 2023.”

For the first half of 2023, Rythm is ranked sixth in the U.S. among more than 4,000 brands tracked by Chicago-based data and research company Brightfield Group and fifth in the flower category.

The Incredibles line of edibles is ranked 12th among all brands and third in the gummies category.

Among the nearly 500 retail brands tracked by Brightfield, Green Thumb’s Rise stores rank eighth on the awareness scale and fourth on the loyalty scale.

In September, Green Thumb is hosting an event to authentically connect with consumers through music.

The Miracle in Mundelein, a two-day music festival at Green Thumb’s first store, will allow on-site cannabis consumption. The lineup features Grateful Dead cover band Joe Russo’s Almost Dead, rapper Action Bronson, reggae musician Stephen Marley and hip-hop group Cypress Hill.

“I mean, we had to do a nod to the original Dr. Greenthumb,” Kovler said, referring to the Cypress Hill song.

Kovler said that despite tough conditions in the industry, his company will keep focusing on growing those genuine connections with cannabis consumers, taking a conservative approach to spending and focusing less on short-term barriers and more on long-term sustainability – the same values Green Thumb has had since its founding.

“It’s kind of a head-down, execute mentality,” he said.

Kate Robertson can be reached at kate.robertson@mjbizdaily.com.