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- 🌴 California, roll up
🌴 California, roll up
Most MSOs have been hesitant to take large positions in California...which leaves the door open to single-state consolidation and other West Coast action
The market potential of California - with a population of 40 million and a deep history in plant medicine - can’t be denied:
Legal cannabis sales in California were nearly $3.8 billion through the first three quarters of 2021. That’s a lotta pre-rolls. It’s also a lot of tax revenue.
Why, then, have enterprise operators been hesitant to enter the market?
A few valid reasons:
Illicit market: Yes, legal sales are solid. But illicit market sales are approx double legal sales, meaning that any licensed retailer is competing against a thriving underground market
Taxes: Illicit market competitors do not pay taxes, obviously, and taxes are a big deal. Retail cannabis is taxed four times in California: a state and local excise tax paid by retail buyers, sales tax paid by customers, and a cultivation taxes that growers pay. It’s a lot
Michael Steinmetz of Flow Kana addressed the plan to increase taxes in 2022 and it’s worth a read
Local Control: Prop 64 has a ‘local control provision’ - where cities and counties can decide for themselves if they will allow cultivation or retail operations within their geographical limits. Over 70% of municipalities ban recreational cannabis sales
These conditions have led to tepid market interest from the usual suspects - GTI has a minor presence, as does Trulieve. Curaleaf and Verano have some manufacturing / processing facilities. Columbia Care is doing its retail thing in California, but not to the extent as other markets.
In other markets, these players are quite aggressive; they are less so in the Golden State. This leaves some room for single-state incumbents and new West Coast roll-ups.
Related
Btw, MedMen, Glasshouse, Cookies - all have great assets in California, but they’ve all been around for a while and are probably familiar to everyone by now. Let’s look at some of the newer California-focused entities:
Not Just Any Parent Company
Formed in January 2021 via a SPAC deal, The Parent Company is (their words):
“…a leading vertically integrated California cannabis company. The company’s three manufacturing facilities provide unparalleled access to high-quality cannabis, while its vast wholesale distribution network of more than 450 California dispensaries, a direct-to-consumer omnichannel platform, six consumer delivery hubs and eleven omni-channel retail locations, currently service approximately 80% of the largest legal cannabis market in the country. The Company’s curated product portfolio includes eight valuable and scalable brands, including Monogram by Shawn “JAY-Z” Carter, Caliva, Deli, Fun Uncle, and Mirayo, which set the tone for The Parent Company’s industry leadership in California and beyond.”
The bold and italics are mine, and they’re what I think are important:
Own the supply chain? Check.
Create an efficient and delightful way for customers to shop and receive cannabis? Check.
Cultivate a quality stable of brands? Check.
Theirs is a playbook that is executed consistently in markets outside of California, but much less frequently here. It relies heavily on a proven and credible retail brand; in this instance, Caliva is the retail backbone.
Unrivaled
Unrivaled is making vertical moves as well. From their recent press:
Unrivaled’s CEO, Frank Knuettel II, stated, “With the close of the acquisition of People’s First Choice and the entry into a definitive acquisition agreement with additional People’s entities, we are pleased to take the next step in building the Company towards becoming the pre-eminent West Coast multi-state operator (“MSO”). The People’s dispensaries, in footprint, location and merchandising, are very attractive, and Santa Ana is an existing high performing asset. The proven methodology upon which the Santa Ana dispensary was built was replicated at the additional locations acquired by the Company, with the LA dispensary opening next week.
“Importantly, the acquisition also affords us, where appropriate, the opportunity to add or replace existing products on the People’s shelves with our brands. In addition to the branded revenue we are adding, we anticipate that the addition of our owned brands on the People’s shelves will increase the Company’s margins and cash flow.”
Unrivaled acquired the People’s portfolio, inclusive of a powerhouse in Santa Ana. They own The Spot in SoCal and the Blum banners as well. Importantly, they also own a full stable of brands, the largest of which is Korova.
The bold part of the quote is the interesting part of the quote. Unrivaled controls retail outlets, but they also have proven brands. Guess which brands are more margin-accretive? Guess which brands they want to prioritize and push first?
It’s the same playbook as more established MSOs (e.g. pushing in-house brands), though the playbook usually requires developing an in-house brand from scratch. In this instance, Unrivaled will leverage existing brand equity with Korova.
A Loud Noise at the Harbor
The most recent California consolidation cacophony (that’s alliteration, folks, you’re welcome) came from the combination of three mainstays: Urbn Leaf, Harborside, and Loudpack.
The combined entity will be called StateHouse Holdings, and I like the structure, and I also like the management. 15 retail licenses, cultivation, distribution, brands with some earned equity (Loudpack, Kingpen, Smokies, etc.).
From the release:
Management believes that StateHouse, which is expected to trade under a new symbol (CSE: STHZ), will be the largest and most developed cannabis platform in the state of California with superior retail, brands, processing, manufacturing, distribution and cultivation. Management believes that StateHouse will have the highest estimated annual revenue and brand market share among its current publicly-listed California peers, providing the Company with a strong platform for growth as a consolidator of California's cannabis industry. Through the first nine months of 2021, Harborside, on a pro-forma basis including revenue of Sublimation Inc. ("Sublime") for the entire period, had gross revenue of US$57.8 million, while Urbn Leaf and Loudpack had revenue of US$45.9 million and US$61.4 million, respectively. Therefore, on a pro forma basis, management estimates that StateHouse would have generated gross revenue of approximately US$165 million for the same period.
The consolidation playbook - “let’s own the supply chain, let’s develop brands, let’s ensure we have an efficient retail footprint to get our goods in customers’ hands” - is not new. But it hasn’t really been done well in California until 2021.
Now, these single-state operators with a California focus, or multi-state operators with a west coast focus, are poised to run fast.
📚 tl: dr
California has been a tough market
Illicit market competitors are hard to fight
Taxes are high
Local control inhibits access
Larger MSOs have been hesitant to enter in a big way, making room for smaller operators to execute go to market strategies focused on vertical integration
The Parent Company, Unrivaled, and StateHouse own the supply chain, own good retail, and have purchased or developed brands
It is Thursday