A write up I did a few months back on the defensibility of Cannabis retail.

I think we can all agree the cannabis sector is poised for tremendous growth for the years to come. But most people tend to focus on the Canadian space. This article will be focused on the US Cannabis space, which has seen explosive growth over the last year.



I constantly hear a major argument against these American operators that retail is dead, cannabis will be bought and sold online, and delivery will be the future. I am here to argue against that, and shed light on why retail may very well be one of the major advantages to the US operators, and even more so for those companies who are allowed to be vertically integrated.



Lets first tackle the common perception that brick and mortar retail is dead. This is mostly because you can’t go a week without headlines about some legacy retail outlet going bankrupt and/or liquidating assets because they cannot compete (e.g: Toyrsus, Radioshack, Circuit city, Payless, Kmart, Sears). There are litany of reasons why these companies didn’t do well, from management, size of stores, lack of innovation… it varies based on whom you ask. One thing is almost certain, these stores did not fail because they were strictly brick and mortar.



When it comes to retail whether its online, offline, or a mixture of the two. I think it’s important to remember that as of Q4 2018 E-commerce sales equated 9.9% of the total retail sales according to US census data. It is not without saying that the e-commerce growth trend we have seen in recent years will continue. But I think the data still very much shows that in the US brick and mortar retail still dominates retail sales, and will for the foreseeable future.

I will briefly touch on how businesses that started online and were extremely successful in that realm are taking a crack at brick and mortar retail. They are transforming brick and mortar to fully compliment their “brand experience”. It seems companies like Warby Parker, Casper Mattress, Wayfair, Bonobos (bought by walmart), Amazon, Microsoft, and many others have begun to realize how you can leverage your brand with a brick and mortar retail presence.



You have Casper mattress company which started as a mattress company that operated solely online. Now realizing the importance of brick and mortar, while at the same time other mattress retailers are struggling to keep the doors open.



Casper CEO Philip Krim tells Racked that his company is thinking about selling mattresses in an entirely different way than old-school stores. Retail done poorly, he adds flatly, “is on the way out.”



“Casper stores are the antithesis of traditional mattress store experience that is notorious for sky-high markups and aggressive sales tactics,” he says. “We are reimagining how people shop for sleep by listening to customers to create an atmosphere where they actually want to visit.” .



Without a doubt Casper has ambitious plans, but at the root of the expansion is this idea that Casper has a brand, and product that now resonates with a wide range of internet users.

But what about those who don’t want to buy a mattress online, what about the vast majority of retail sales that happen in brick and mortar locations?

Casper knows if they can capture part of that market, it not only increases sales, but increases brand awareness (which in turn increases online sales as well). Casper is not just putting mattresses on the floor of these showrooms, they are providing an “experience” that is nearly impossible to get anywhere else while shopping for a mattress. Or that’s the plan anyways.



Let’s use another example… a big example,



Amazon. Amazon is a household name in every home(?). I think most people know this company started with books. Then ended up selling you anything and everything you could possibly imagine (within limits). The company started online, and made its name for itself online. But something changed as it evolved into a mature online company. They realized you can do great online, but it has its limits today, and will have its limits tomorrow. So Amazon opened itself up to brick and mortar.



They started with brick and mortar bookstores, ended up buying the largest Natural foods grocer (Whole foods), and then moved to Amazon Go a grocery store that has no cashiers. There is a reason why Amazon made these decisions, and since its amazon you can pick up any number of books, or read numerous articles online outlining why they made these decisions. I believe it has something to do with the brand power of Amazon, and the tremendous opportunity in disrupting/transforming brick and mortar retail with technology.

Before these tremendously successful internet companies opened brick and mortar stores they developed a brand, and experience that people found inviting and exciting. You can order a mattress delivered to your door from a cool website that promises you a better sleep with no hassles(Casper). You can order eyeglasses at good prices, shipped to your door and a satisfaction guarantee you would be hard pressed to find at any nationwide chain operating at the time(Warby Parker). These companies used the power of the internet to bring massive change to the consumer. A change that was clearly welcomed.



So at this point you would have heard the mention of “brands”. I do believe they are a key to the retailers I listed above success. Brands encapsulate more than just the way the product looks, they encapsulate the culture that created them. The topic of this article is about cannabis and retail, so here is where we begin our journey into the exciting times of Cannabis retail.



Just like the companies above, we are beginning to see some very exciting retail brands in the legal/not legal markets in the US. These companies consist of players such as Medmen, Ianthus, Green Thumb industries, Cresco Labs, Acreage Holdings, Trulieve, Curaleaf, New England treatment centre, and many others. Whilst I may dabble a bit on individual product brands. I am going to primarily focus on retail brands.



With Cannabis in the US you have a massive amount of challenges, and arguably the biggest opportunity. It was estimated that in 2016 black market cannabis sales made up 87% of all cannabis sales in North America. Legal sales were estimated to be $6.9bn while illegal sales were estimated to be $46.4bn, this is a staggering statistic. While we can’t expect to eradicate the black market instantly. This simply shows the tremendous potential that comes from moving black market sales to legal channels.



Source: Illegal Pot Sales Topped $46.4 Billion in 2016, and That’s Good News for Marijuana Entrepreneurs



Since 2016 a number of states have legalized cannabis for medical use, as well as a few states have legalized for recreational use (the biggest being California in 2018). While there is plenty of work left to be done, we are seeing a big shift of policy in almost every state. The government is finally realizing that the war on cannabis has failed, and a thriving marketplace has been happening in the shadows. Without a doubt legalizing Cannabis in one form or another will bring business from the black market into the legal market. Creating jobs, tax revenues, and advancements in medicine.



Most in the industry will say the genie is out of the bottle, and you can’t put it back in. Going backwards from here is not an option. So the focus now turns to taking bites out of that illegal market and creating the “New Normal” (stealing a line from the new Medmen campaign).



With all these new states breaking down barriers and opening themselves up to the world of cannabis, new companies are being formed. These companies that I mentioned above are keen on working with governments, creating awareness, providing safe environments for consumers to go and learn about cannabis, creating jobs, and of course these companies are looking to capitalize on the estimated $80bn market by 2030 (projected by Cowen analyst Vivien Azer).

With the cannabis market being brighter than ever before, we have a number of companies entering the marketplace.



As a result you have beautiful dispensaries popping up all over. One of the most well known retailers is a company by the name of Medmen. Many news outlets have concluded that they are the “apple store of weed”, and you would be hard pressed to argue against that.



The company operates retail cannabis stores in California, Nevada, New York, Arizona, Florida, and Illinois along with many other states to come. The company is big on marketing and connecting with its customers via social media (no other cannabis company has anywhere close to the social media following). They have a brand that they hope continues to resonate with customers, and they have an ever expanding retail footprint that will look and feel the same from coast to coast.



The company believes strongly that brick and mortar retail is critical to its success, and that zoning laws help create a permanent moat for years to come.



Let’s spend a moment discussing zoning laws. With Cannabis being federally illegal it isn’t treated like any other consumer good. It is required on a state level to be regulated, and then it is regulated even further at the municipal level. These US companies are forced to abide by these laws in order to do business. These laws also allow for distinct advantages to those who spend time working within them.



If we take an example of Boston which is slowly rolling out recreational cannabis dispensaries. The law states that a cannabis dispensary is not allowed to open up within a half mile of another dispensary, and at least 500 feet away from any elementary school/high school. This may not seem like that far of a distance. But if planned wisely you can corner off major population areas with very few dispensaries.



Source: Boston Blazes Trail With New Recreational Marijuana Zoning Regulations | News | The Harvard Crimson



E.g. The proposed medmen location by Fenway Park in Boston. It is highly likely that if you wish to indulge in some cannabis before a red sox game your closest option by far is this proposed medmen location.

Another example would be Miami Florida where the current law states: There must be 1200 feet between dispensaries, and 500 feet from schools. On top of that only certain areas of Miami have allowed cannabis dispensaries.



Source: Miami Beach passes new marijuana dispensary restrictions | Miami Herald



You can look at Santa Anna California which has a predetermined number of licenses to be issued, and they only allow the businesses to operate in certain areas (the purple areas on the map below) as well as the fact they cannot operate within 500 feet of another cannabis dispensary, and they cannot be within 1000 feet of a school, park, or existing residential zone.



Source: https://cannabiscorplaw.com/wp-content/uploads/2018/03/RegistrationApplicationProcessPresentation.pdf



If a company can navigate these barriers, and every US MSO has a team working on navigating these complex laws. It provides an opportunity within the next few years to completely shut out retail competition. The complex zoning restrictions are a barrier for some and an advantage for others. It will allow first movers the opportunity to operate dispensaries in the most sought after areas from an economics perspective. This advantage only comes around once. Those who are late to the party, will be stuck with the crumbs that the first movers leave behind.



The first mover advantage is not to be ignored, and while some may argue that the big Canadian companies (Canopy, Aurora, Cronos, Tilray) will just brute force their way into the US market. They very well may be too late. And may be required to acquire current operators who have locked down prime retail locations, and limited licenses. (Canopy solidified its play in the US with the proposed merger of Acreage Holdings + Canopy)



It’s important to note, that while investors in the space are well aware of the players in the market currently, and they certainly have their favorites.

An investor might seek out a dispensary they are invested in. The average consumer is going to go to the store that offers them the best service, that is relatively close, and offering a unique experience and brand that resonates with that consumer.

The companies that can differentiate themselves from competitors, and can offer consistency across state lines, with retail in prime locations will ultimately win the biggest pieces of the pie.



In this ever changing cannabis landscape looking for prime retail locations, brands, and operations in key states will be a winning combo. All that will be left is for these companies to work with the government on all levels, to shift the black market over to the legal market. That shift is happening, and will continue to happen. (This is very much a process)



Once federal prohibition ends you will have a handful of well established American Cannabis companies who will be poised to dominate the markets they are in.



Brick and mortar retail is not dead, and cannabis companies will rely on it for years to come.

Just my thoughts -Cosmo



