Yesterday, a friend’s 80-year-old dad called me to see if I could help sell his cannabis flower. He’s a tech guy from Silicon Valley and bought a big indoor grow facility. They decked it out with the best equipment, hired a great grower and turned a few harvests. Now, they have over 2,000 pounds of premium indoor cannabis and wanted to know if I could help them find someone to buy it. At current rates, that’s about $4mm in product.
I did not know anyone looking for $4mm of flower, but we did have a constructive conversation about the dynamics playing out in the California market. There are too many grows, not enough retail and a glut of product on the market. And, the conditions will not change anytime soon.
Players in California need to be well capitalized and prepared for this type of environment. It won’t last forever, but will take a few quarters to get more retail stores open and even the supply and demand imbalance.
California companies we are interested in have a few characteristics:
- Proven brands that consumers request. This is very different from other great flower without a recognized name. There’s plenty of beautiful indoor Ice cream Cake on the market. That’s not enough.
- Scale: California is the cannabis capital of the world and would be the 5th largest economy in the world. To compete, you need to have the resources to grow at scale to achieve acceptable margins. Unfortunately, Prop 64 was written to weed out the small, craft growers and it is succeeding.
- Vertical integration: in the cannabis world, this means one company has the ability to grow, distribute and sell their stuff through retail stores. This gives one control of the supply chain and enhances margins.
The Green Giants portfolio is underweight California, but we do have selective exposure. It’s the cannabis capital of the world in terms of culture and quality. California alone is bigger than the entire Canadian market— there are 39mm people that smoke a lot of weed. Our exposure tends to be in dominant low-cost producers with premium retail locations in limited-license cities.
I hope my friend’s dad is able to move his flower. It looks great. But, his experience is one of the very reasons we favor the most proven, well funded and experienced businesses. Personally, I enjoy craft brands and will continue to support them with my purchases. However, when it comes to my investment portfolio it is more evident than ever that Green Giants are going to be the long-term winners.