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CANNABIS ANALYSTS

The authority when it comes to analyzing the cannabis industry

Competitor Facing Strategies: Understanding Where You Stand

There are many attributes that go into planning a dispensary: ensuring product excellence, hiring the right people, increasing productivity, financial forecasts – but what about having the proper strategy to tackle your market? We don’t mean just any strategy, but a competitor-facing strategy to win market share. Your dispensary will be up against large, well-backed, deep-pocketed enterprises that are spending $2MM-$10MM to open retail and cultivation facilities (MMM in Massachusetts or this one in CT).There will most likely be several of these multi-million dollar dispensaries near yours. Some of your competitors will even have strong medical and political connections.

Just like with a strong army, a strong company can use its power to stay on top, with more resources devoted to developing products and keeping prices down. Playing the defensive position would also be insufficient as you stand vulnerable to being inundated by a much larger force, even if they are in a neighboring county.

You are in a creative industry that caters to the minds of medical patients and (eventually) consumers. There is no creativity in outspending your opponents; you need intelligence, imagination and nerve. Managers and entrepreneurs cannot become shortsighted, absorbed by finances and daily sales, while the competition thinks long term and stays focused on products. Here are a few thoughts you should keep in mind when formulating your strategy:

1) Determine Your Starting Point: A good strategy starts with an evaluation of the nature of the challenge, simplifying the complexity of reality, and identifying the most critical aspects of the current situation. Survey your competitors, the closest 3-4 dispensaries around you. Visit their stores. How large is their retail space? How many strains do they offer? What types of patients visit (gender, class, etc)? How inviting is the facade? How many pounds do you think they move each month? Is there room for them to expand? Local market intelligence is key– stay on top of changes– the more dynamic the situation the poorer your foresight will be. Visit dispensaries in another state and talk to their managers, if possible; learn about their experience.

2) Share Your Insights In A Blog: the industry is still young and thought leaders are needed; many tech startup founders have blogs that both explain and advertise their ideas and creations to the world. Running a business can be difficult and managing different strains tedious, but customers are now plugged in as ever to the web. It’s a white space out there, dictate the terms of the conversation and help fill it. Those with the knowledge but not the power to clearly express themselves might as well have no ideas.

3) Apple Store Appeal: remember how enticing and welcoming an Apple store is? Invest in cleanliness, sharp and able employees, and clear product display cases. Also, it may be unprofessional to let employees use marijuana on the job; think how you’d feel if all the Apple store employees were constantly texting on their iPhones.

We’ll return to the broader concept of strategy and marketing later on. Avoid fluff, muddled or sloppy thinking. Define the challenge to be addressed and don’t declare objectives while disregarding the means for achieving them. Any broader plan is determined by where you start, and many are unaware of just how much is going on in their current situations.

Revenue – Cost Analysis Part I

We have to thank the State of Massachusetts for making such a wealth of information available to us– we love analyzing it. Let’s take a look at revenues. Basically, the vast majority of MA dispensaries used Colorado’s and California’s historical data to help justify their revenue projections. These projections are required in the applications as part of the business plan.

We examined the top 20 dispensaries with the highest quality business applications that were successful in obtaining licenses. During the first year, they expect to have average revenues of $4.3M per dispensary (with a median of $3.7M). The highest revenue-earning dispensary is New England Treatment Access, of Norfolk county, with an outstanding first year revenue of $11.9M based on 2,000 patients visiting and purchasing an average of 1.6 oz per month. On average, first year expenses are $4.4M, resulting in an average expected net loss of $100k per dispensary. Roughly half of the dispensaries we examined expect net losses in the first year. However, the second operating year is accompanied by very significant revenue growth and lower cost growth, because most of the start-up expenses are incurred within the first year.

For the second year, dispensaries expect their revenues to increase on average ~100% from the first year– that’s right, they expect to double their revenues to $8.5M. The main rationale behind this increase is increasing market penetration: dispensaries expect to go from roughly 50% patient penetration in the first year to almost 100% penetration of the local addressable market (i.e. # patients in county). This also assumes that every patient who needs medical marijuana will eventually purchase it legally from a dispensary. This is true especially as consumption spreads and doctors become more comfortable prescribing cannabis treatment, a story and growth trajectory that has proven true in CO and CA.

On the other hand, costs in year two are only expected to increase by 60% to an average of $7.0M, resulting in an average profit of $1.5M or a profit margin of 18%. During the 3rd and last year of available projections, revenues per dispensary are expected to increase on average 24% to $10.5M, and costs increasing 14% to $8M. Earnings on average rises to $2.5M, a 23% profit margin.

What do you think? Are these growth rates too bullish? Not every state is like CA or CO, only time will tell and growth rates are heavily dependent on number of addressable patients, frequency of visits, and average purchase size. On the profit side, several adjacent industries are more profitable. Look at the e-cigarette business in Oklahoma, a mere $50K initial investment might result in $400K revenue for a single shop. Nevertheless, remember: dispensaries are nonprofit – at the end of the day, your goal is to help those who are ill in the best manner possible, so use those profits to reinvest in your business and beat the competition for the long-term! The most important thing to remember is you’re in it for the marathon, running the first mile may be tough, but there’s 25 more to go!

Ingredients for Approval

As we noted in the MA Dispensary Analysis post, the Massachusetts government has made getting into the industry a serious business process that requires deep pockets from in-state residents. Meticulous protocols and procedures are required (though for some, the steep barrier to get in has caused applicants to blatantly distort their applications). The MA application fee alone is $30K. Then, after approval, you have a $50K fee to register as a dispensary. There are several other requirements:

  • A Board of Directors
  • A believeable budget and three-year business plan
  • Be able to cater to medical needs first and foremost (e.g. offering discounts for patients in financial hardship)
  • Posses medical and business professionalism
  • Posses the clout and ability to work closely with the host communities
  • Posses Show a bank account with $500k cash in the name of the dispensary

The top ranked dispensary, Medical Marijuana of Massachusetts, which has not been accused of misrepresenting its application, is run by the Chief Operating Officer (COO) and the Chief Financial Officer (CFO) of the Ophthalmic Consultants of Boston . Rounding out the team is a former DEA agent, a 30-year veteran police officer, an ex-president of a substance abuse treatment center, and…well, you get the picture. They may not have experience growing, but they have been extensively “delivering the highest quality healthcare.” It looks great on paper, and the fawning authorities loved it.

Of course, a business in the industry requires a proper public relations plan: patient services, education, privacy— all are necessary. Also, working closely with existing medical service providers, like hospices and other patient support groups, demonstrates a dispensary’s ability to increase awareness. The professionalism should translate into proper office setting (e.g. no images of marijuana leaves on the wall), and in case things go wrong, MMM has liability insurance for $1MM of coverage (costing $165k per year).

It is also important to win approval from local authorities. MMM obtained letters of “non-opposition” from the City Council. In addition, it helps if you’ve been operating a medical practice for 30 years, as MMM’s principals have done. In fact, MMM was one of the few dispensary applicants that obtained a letter of support from town authorities (pg 23-24). We think there are three other important points to highlight:

A) Security: the application blacks out this portion but there is no doubt dispensaries should have armed guards, closed loop security cameras, limited visibility from the street, professional safes for cash storage, and collaboration with local police to ensure operational transparency. MMM’s dispensary will have bullet proof glass, too.

B) Well Compensated Staff: President, CFO and Chief Compliance Officer are paid $250k per year, Head of Cultivation coming in at $150k per year, Director of Security and Community Outreach Director paid $100k per year, etc. (page 34). Those are pretty high salaries!

C) Product Testing: MMM is using a top rated third-party marijuana testing service. This is important in ensuring proper quality. Because marijuana isn’t FDA approved (no inspectors will tour the growing facility), there is a significant business opportunity to provide an accepted seal of approval. Testing is a great recurring revenue business because every growing period, every batch needs to be certified.

Barriers are steep in MA, the steepest process out of any state going through marijuana legalization.  The costs (not the requirements) listed above are probably on the high end of what’s needed. Yet, other states that do not have a history of dispensaries may follow similar footsteps toward licensing. It’s not a bad idea to cover all your bases. And just like a pilot going through protocol prior to take-off, having a proper checklist will vastly improve your organization’s capability and probability towards approval.