Profit: Predictable Baselines for Predictable Revenue

2018-05-03T20:36:52+00:00April 23rd, 2018|Campaign, Profit|

INTRODUCTION

In any industry, meeting consumer expectations is critical to profitability, brand dominance, and survival. This is especially true in regards to consumable products. In this market, consistency is king, and having uniform industry standards between businesses is the key to creating consistent product and meeting those consumer expectations. As we are in the early stages of the cannabis industry, we are just now bumping up against this issue. With no facility standards or baselines for grow sites, extraction, and packing facilities, we are seeing significant financial unpredictability due to the inability to make business to business comparisons. The unmeasured cost of building and running a cannabis facility combined with the overwhelming supply is causing many small businesses to struggle, leaving open the space for larger businesses with more resources to consolidate. While the challenges for small businesses in the immediate is very real, the influx of investment and growth of brands can pave the way for standardization and the beginning of a level playing field.

THE PROBLEM

Facility standardization and the creation of a baseline is incredibly important to determine profitability because it lays the foundation for everything that follows. Without a median building cost we cannot determine a baseline for start up costs and capital investment. Without start up costs, it makes it difficult to determine operating costs as they compare to others operating in the same marketplace. This leads to further challenges in determining accurate production costs and, consequently, accurate market value.“I don’t know any other market where, in any given year, you don’t really know what your cost of goods is going to be,” said CEO and Founder of the Meriwether Group, David Howitt. “You don’t have variations of more than 5-10% [in a typical market].”

 

On average, timelines and upfront capital costs for entrepreneurs entering the industry are typically up to 3 or 4 times more than expected, primarily due to the transition to the legal market. Since legalization, we have seen undercover facilities built with inadequate equipment transition to facilities built with commercial equipment and effective design by qualified professionals. While the benefits of this seem obvious, the strain on startups is significant. Creating a business that is both energy efficient and prioritizes consumer and employee safety takes significant investment. Further, businesses that are trying to achieve best practices have difficulty differentiating themselves from competitors who are cutting corners. Facilities that are investing the bare minimum and giving low priority to energy impact, worker, and consumer safety can produce and sell their product at a much lower cost. This causes the businesses aiming for reasonable standards, to struggle to keep competitive profit margins. With no entity or agency to enforce these types of standards, we are leaving new businesses in a volatile market, and vulnerable business owners seeking anything to give them an edge. Leveling the playing field gives this industry its foundation and simultaneously gives entrepreneurs a fighting chance to stay in business.

 

Until we have standards that everyone in the industry can follow, we will not have the ability to create the type of consistency and metrics that lead to brand loyalty and profit. “Consumers need to have their expectations met,” said GroTec CEO Anya Gordon. “From an economic standpoint, it is standardization in facility and practice that ultimately enables you to optimize, and it is that optimization that gives that business its edge.” Like many corporations, Starbucks is successful because it can replicate the exact same product no matter which location a consumer visits in the world. The reason for this is that they follow the exact same standards at every facility, from the ingredients of their beverages to the interior design of each cafe. Data on their production costs, market value, and profit projections are easy to track because of these consistencies. The cannabis industry will need similar baselines in order to succeed. While the short term investments may be a challenge, the long term benefits will be measurable.

In July 2018, Massachusetts will officially open legal marijuana dispensaries throughout the state. Like most states who have gone through legalization, they will face many of the same issues that Oregon has encountered. As each new state crosses the threshold of legalization, they learn from one another. For example, Massachusetts has taken the initiative to implement some of the strongest energy policies of any state to date. According to The Boston Globe, these tighter regulations are due to a state obligation to reduce greenhouse gases by 2020, but facility owners are facing potentially more expensive build out costs in order to meet these standards. The Boston Globe also reported that, “even with a 12-month grace period to comply with the standard, existing medical marijuana facilities that want to offer recreational sales will have to spend millions of dollars retrofitting their current cultivation operations. Other companies are midway through building out facilities and must now weigh whether to stop and switch to a design that would accommodate LEDs.” While it’s understandable that businesses entering the industry are frustrated with higher startup costs, instilling these regulations is necessary to create a safe, economically sustainable, and eco-friendly industry. Ultimately, people will need to come to terms with the fact that to build a sustainable grow site that values employee and consumer safety, they will need significant time and investment, and recognize that it is the only way to create a thriving industry that will benefit everyone in the long run.

THE SOLUTION

If the cannabis industry waits for regulations to dictate a solution, they will find themselves facing over-regulation when cannabis becomes federally legal. The industry would greatly benefit from establishing its own baselines in order to begin tracking data and predicting profitability to level the playing field. While the cost of instituting best practices may be high, the cost of waiting will be higher. By playing an active role in both setting and implementing these standards, the industry ensures they are applicable and relevant as the big players enter the market. It also ensures that both small and large businesses are equally accountable for their processes. One of the most important aspects of this process will be engagement. We will need both public and private interests to get involved and bring together the broad knowledge necessary to set us up for success. Creating and utilizing these standards can become hallmarks by which brands can differentiate themselves. Consolidation may seem to undermine smaller independent producers on the surface, but in an industry with no precedent, the investment it brings will ultimately open significant opportunities for all.

 

GroTec can assist facilities who are ready to adhere to the best practices and begin working together to establish standards. We can help with maintaining a facility’s presence, increasing profit through streamlining systems, decrease risk through proper install and high standards, implement efficient workflow, and help to produce better and more consistent product. We can help to maximize production and prepare a business for the inevitable standards to come. GroTec can get farms up and running efficiently from a maintenance standpoint so that when federal regulations take the stage, farms will be compliant using our young industry’s best practices.