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Wednesday, June 3, 2020

Let’s be blunt: The weed industry is on fire

Illustration by Cole Sandhofer, background courtesy of North Coast Journal

By Ian Ferguson

The future of cannabis is writing itself, but industry experts say the story is looking all too familiar.

The federal legalization of the psychoactive plant passed in Canada on Oct. 17, and now dozens of companies are in a battle, for control of the industry’s assets.

Michael Dykstra is a Western alumni who has been at the forefront of the pro-cannabis movement for over 13 years. He is currently the CEO of two cannabis companies in Whatcom County, Mt. Baker Homegrown, a small-scale cannabis farm; and Terpene Transits, a transportation service for cannabis products.

According to Dykstra, the events taking place in the world of cannabis show a potential trajectory for its future: rapid industrialization.

Dykstra said there are vast changes currently taking place in the industry, but to him they come as no surprise. He said the current progression of cannabis is standard in new and emerging industries.

When Initiative 502 was passed in 2012, making recreational cannabis legal in Washington, many cannabis enthusiasts rushed to stake their claims. The market quickly became oversaturated, and according to Dykstra many companies are now struggling to stay afloat.

“They came in thinking they could make a ton of money, they came in underfunded,” he said.

According to 502data, a website that compiles information about Washington’s cannabis industry, Whatcom County has 74 licensed producers and processors, outnumbering retailers nearly three to one.

Logan Helgeland, a Western alumni who currently works for Charisma Entertainment, a marketing company that builds cannabis brands, said with so many producers in the market, retailers have all the negotiating power when deciding who to put on their shelves. He said this forces producers to sell their product at cheaper and cheaper costs.

But that is not the only challenge for producers. Initiative 502 does not restrict the amount of profit retailers can make on the products they sell. As a result, Helgeland said some retailers in the cannabis industry are marking their prices up to 300 percent wholesale value, making huge profits off of the farmers.

According to Helgeland, this differs from other agriculture industries, in which the government sets restrictions for retailers, meaning they can’t increase the shelf price of a product for higher profits.

Amber Vaughn, COO of Terpene Transits, said this makes it difficult for growers because their brand may be poorly represented based on the pricing that the retailers decide to sell it at.

According to Vaughn, the competitive market coupled with the high costs of growing cannabis is forcing the industry to consolidate.

“Farming is hard, especially cultivating it indoors. It’s extremely expensive to do so, and to do so long term,” said Dykstra.

Dyksrta, Vaughn, and Helgeland all believe that the companies who emphasize good branding will be the ones that prevail.

Helgeland works with Charisma Entertainment to give power back to the farmers by building them a strong brand. The principle is simple, he said: the more people hear about a product the more people will buy that product.

“If you’re not in the top three of consumer recall, no one’s going to buy your product,” said Helgeland.

If you look at any other company marketing is extremely important, he said. However,  many of these farmer’s budgets are so restricted that marketing isn’t a crucial factor for their business. According to Helgeland, this could be their demise.

For small cannabis companies like those in Whatcom County, Dykstra and Vaughn foresee a trajectory that mimics the craft brew industry, which starts out small and appeals to the consumer that is looking for quality and artistry in their brew.

Illustration by Cole Sandhofer

But a tasty beer, or a homegrown, pesticide-free bud, doesn’t exactly equate to financial success. According to Helgeland, that requires a strong brand that consumers remember when browsing the shelves at the supermarket or in a cannabis shop.

In recent years, successful branding for craft brew companies have attracted the attention from the world’s largest corporate conglomerates in the alcoholic beverage industry.

In 2018 Anheuser-Busch InBev was named the largest alcoholic beverage company in the world by World’s Top Exports, an organization that analyzes data from all kinds of industries. From 2014 to 2017, the company bought nine separate independently owned craft breweries; the Seattle-based Elysian Brewing Company was one of them.

“It’s what they call golden handcuffs,” Vaughn said.

According to Dykstra, that is what many cannabis growers, himself included, are looking for- a way to cash out. Both of them believe that this is the ultimate fate for many businesses in their industry.

Paul Meeks is a finance and accounting instructor at Western and chief investment officer of Sloy, Dahl & Holst in Portland, a company that tailors investing portfolios for their clients.

Meeks said there is a term in the finance world to describe what Vaughn and Dykstra predict in the cannabis industry. He said it’s called rolling them up, meaning a company will buy out a slew of smaller companies to gain power in an industry.

“When you roll up the industry, instead of having a fragmented industry with 170 people doing it you have like four kings,” Meeks said. “As [cannabis] becomes mainstream nationally, you will probably have the kingmakers start to try to position themselves to have the assets before it takes off.”

With cannabis soon to become federally legalized in Canada, the industry is moving toward mainstream, and the headlines have proved it.

On Oct. 15, the financial media outlet Bloomberg published its weekly issue of Bloomberg Businessweek. The front page pictured a cannabis flower, with the words “Pot of Gold?” written across the top. The issue featured five articles on the global business of cannabis.

Tilray Inc. is a medical cannabis company that has been making headlines for its skyrocketing stock prices on Nasdaq. On June 19, the company made its debut to the market with an initial public offering set at $17. Since then the stock has risen to a high of $300, and now resides at $111.55- the closing price as of Nov. 13.

Constellation Brands, the owner of many popular alcoholic brands like Corona, Pacifico, and the craft brewery Ballast Point, also made headlines as the first Fortune 500 company to buy into the industry.

Illustration by Cole Sandhofer

On Aug. 15, they told the press they would invest $4 billion into a Canadian cannabis company called Canopy Growth. They now own 38 percent of its shares, making it the largest deal made in the industry to date.

“Over the past year, we’ve come to better understand the cannabis market, the tremendous growth opportunity it presents, and Canopy’s market-leading capabilities in this space,” Constellation Brands CEO Rob Sands said.

Canopy Growth has five separate brands under its name, including Tweed, which Canopy Growth calls the most recognized cannabis brand in the world. Now in partnership with Constellation Brands, the companies plan to further strengthen their global leadership in the cannabis industry.

“Cannabis has changed, it’s not like back in the day,” Dykstra said. The industry is more complicated than ever now, and its progression forward is relentless. Legalization throughout the world is inevitable, Dykstra said.

“A lot of the smaller farms are going to go under, the ones who can create a brand for themselves are the ones who are going to stick around,” Helgeland said.

The companies who are going to survive will have to be savvy in the world of business. But most of all, according to Dykstra, they will have to be passionate about cannabis.

 

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