Photo by Kindel Media, via Pexels.
The
cannabis business is tough. Across the nation in states with more
open licensing schemes, supply is rising and prices are coming in
fast. Competition is ever increasing, consumers are demanding higher
quality products, and profit margins are being eviscerated.
Many
operations are struggling with sales velocity, compliance costs are
rising, and with new tax, labor, environmental and regulatory
requirements, many operating in the farming space, are failing, fast.
This
piece will summarize an oral presentation I give designed to help
farmers achieve financial success despite the challenges listed
above. This 9-point plan, if taken seriously and executed well, can
help you not only survive but thrive in what promises to be an
increasingly crowded space.
Understand
the Operating Environment
Cannabis
cultivation entails significant risk but offers significant
opportunity as well. As has been argued for years, bulk flower prices
are heading in one direction – down. In all likelihood, this trend
will continue and prices will eventually find equilibrium –
presumably at much lower levels. Without high volume and very low
production costs, playing the bulk sales game will ultimately
collapse most farms.
The
alternative, acquiring shelf space and selling packaged products at
the retail level still evades most farms. Large vertically integrated
companies grow, package, and sell flower through their own
storefronts. Other well-heeled operations pay slotting fees to
acquire shelf space or employ regional sales reps and brand
ambassadors to tell their story, create retail relationships, and
move packaged products with higher margins.
In
addition, thousands of small operators are seeking the same prize,
either through their own label or a white labeling agreement with a
copacker. At the end of the day, competition for valuable shelf space
is significant and will only increase in time. To succeed in this
endeavor a cultivator must understand retail and consumer needs, and
meet those needs better than others – either through quality,
specialization or price point.
What
can you do to help retailers improve margins? Can you deliver a
product that is so smoking hot and in such high demand that retail
foot traffic and sales improve in the stores carrying your
merchandise? If you can, prices will firm significantly and your
cultivation operation will flourish. Taken one step further, imagine
a scenario where across the nation everyone is demanding your stuff…
a truly viral situation where folks are talking about and singing
about your flower or extract. Prices for that label will melt upward,
to levels only dreamed about previously. Will that label be yours?
Conduct
a Feasibility Study
Given
your skill set, expenses, and product focus, can you function in a
paradigm of rising costs, falling prices, and ever-increasing
competition? Given the marketplace we actually have, can you pay the
bills with bulk sales or by growing flash frozen? Can you maintain
the size of your current operation, or could you reduce your
cultivation footprint in an effort to control costs and improve
quality?
Cultivators
of all sizes are faced with the same questions. As we have seen from
our neighbors to the north, even large corporations are scaling back
their cultivation footprint and right-sizing their operations to
focus more on quality and less on volume.
How
long can you hold out? Can your operation sustain losses for a few
years, hoping for better days ahead with national and global markets,
or does getting out now make more financial sense?
Being
realistic about business is critical for cultivators. While the
current realities in Cali cannabis are sobering to say the very
least, maintaining unrealistic expectations does not serve anyone
well … it can also break the bank.
Some
believe that this year will clear the deck in Cali, meaning that so
many operators are going to shut down that supply will slack off and
prices will firm. I personally believe that new developments
currently underway will more than offset farm closures and also
believe that distressed asset sales will only bring new entrants to
market. Some of the largest MSO’s have a modest footprint in the
Golden State and I assume they are simply waiting for a better entry
point. Only time will tell.
Professionalize
and Formalize Your Operation
I wrote a column on this point a few months ago and the feedback was
overwhelmingly positive. Regardless of size or resources, we can all
improve our businesses by professionalizing and formalizing our
operations. Here in Humboldt, there are plenty of free resources
available to small business owners – business planning, budgeting,
marketing, and operational assistance are available, for free.
Regardless of formal education or experience, we can all create a
mission and vision statement, identify our target market, and craft
our product offering appropriately.
Perhaps
your cannabis play is in the area of health and wellness, perhaps
it’s medicinal, or recreational. The marketplace needs to know
where your heart is. Maybe you grow because you believe in cannabis
as a tool for harm reduction. Maybe it’s to help people manage
health issues or simply to improve people’s overall sense of
well-being.
Whatever
the case may be for you, the market needs to connect with your
offering and understand how your products are uniquely positioned to
help them. Maybe it’s the terpene content of a strain you have bred
– perhaps it helps combat nausea or inflammation better than other
strains on the market. Maybe it’s the taste, smell, or cannabinoid
content that differentiates. Whatever the case may be, showing how
your product is different and useful will help you rise above the
competition and carve out a lasting niche in the business we love.
Focus
on the Profit Function
The
profit function is one of the most fundamental concepts in business.
Revenue minus costs = profit.
Clearly
understanding your farm’s sources of income and understanding your
company’s costs in exquisite detail is a must.
Where
will you be selling flower or biomass? To who and for what price? How
much does it cost you to grow a pound? Let’s not forget that many
farms operated without a formal budget for years. Few farms were
aggregating expenses or using accounting software – the money was
flowing freely and every dollar invested in a farm had a huge return
for years.
As
things have tightened up, understanding where every penny comes from
and where every penny goes is a must. Working with a competent
bookkeeper or CPA, tracking expenses with accounting software like
QuickBooks, and forecasting the timing and amount of revenues is
critical for your operation.
Have
you secured a forward or contractual arrangement for your flower
ahead of time, or are you growing flower and hoping it sells?
Contractual arrangements can help provide security to your operation
and help immensely with budgeting and forecasting.
By
having a realistic and accurate understanding of revenue and costs,
you can make a more informed decision around whether or not
continuing in business makes sense. The last thing you want is to
bite off more than you can chew…spending money to produce a product
you can’t sell. That leads to wealth erosion, enormous stress, and
bankruptcy. Do the hard work. Understand your business’s finances
in excruciating detail and you will be more informed and able to
operate from a place of knowledge and strength.
Understand
Developing Resources & Stay Connected and Informed
Our
industry is developing rapidly. Getting plugged into industry data
and developing resources can empower you, improve cultivation
outcomes, and drive profitability for your business. Online chat
rooms, industry events, informational sources, and developing sales
platforms are coming online with greater frequency. Meeting others
throughout the supply chain, sharing technology and resources, and
upping one’s business and cultivation skills has never been easier.
Social
media platforms like Linkedin and others are ripe with opportunities
for collaboration, knowledge sharing, and mutually beneficial
business relationships. Resources like the Elevated Botanist publish
high-quality cultivation pieces that can help you up your skills in
the dirt and boost production.
The
days of hiding in the hills are over. Companies that are well
informed, well connected, and adept at forming business relationships
will have far greater success and staying power than those who
isolate or go it alone. Becoming a resource for others, participating
in collaborative projects, and asking for help when needed are skills
we can all learn and benefit from.
Our
industry is developing rapidly. New discoveries about plant care,
business management, and effective marketing are hitting the street
regularly. Make sure you are in the know and that you seek
information regularly – it can make a world of difference.
Work Smarter (and Maybe Harder Too)
Systematizing
your operation in an effort to produce predictably amazing and
consistent results is a must. Documentation and systems creation are
hugely important in creating a well-functioning company. Killing it
one run and bellyflopping the next happens in cultivation regularly.
Creating a winning process and executing it precisely and
consistently is a must – especially in an environment of declining
margins.
Putting
in the time necessary to be successful is also increasingly
important. Unfortunately, farming is not an industry well known for
work-life balance. Cultivating cannabis successfully, especially at
some scale is a real grind. It takes commitment, energy, passion,
consistency, and physical sacrifice.
Cutting
corners, working 4–6-hour days, and relying on others to do work
for you is not going to cut it in the current paradigm. Sweating it
out, working sacrificially, and honoring those who help you along the
way are critical.
Be
Thankful and Honor the Plant
Working
with the plant is a blessing, remember that always and behave
according. Allowing pests and pathogens to overwhelm your garden,
growing spindly sick-looking plants, failing to shape, bottom, and
core your ladies, and simply neglecting them out of laziness are all
recipes for disaster. Growing lush, stumpy plants with heavy,
beautiful flowers is the best way to succeed in cultivation these
days. That doesn’t happen by itself.
Touching
the plant regularly, giving her what she wants when she wants it, and
honoring the cultivation process and your natural surroundings will
bring better energy to your farm and help improve results.
Care
For Yourself Physically and Mentally
Farming
cannabis is not for the faint at heart. Physical and mental strength
are important for longevity and success in this business. Drug and
alcohol use, being out of shape, and failing to sleep well will not
serve you well as a cultivator or cannabis business owner. Caring for
your body and your mind will help you operate at a higher level and
will help you perform at your best, month after month, year after
year.
Exercising,
eating well, getting enough sleep, and caring for yourself
emotionally and spiritually will carry over and improve your
performance in the garden. Stress, burnout, emotional instability,
and substance abuse will inhibit your efforts and will show up in
terms of lackluster production and product quality.
Farming
ganja is a marathon, not a sprint. Producing larger volumes of
high-quality cannabis does not happen by itself. It takes commitment,
love, passion, strength, and physical/mental endurance. Remember that
and live well.
Manage
Business and Personal Finances Prudently
Regardless
of company size, margins for California cannabis operators are slim.
Solidifying company financials through cost control, budgeting,
forecasting, and documentation is critical. Understanding the
financial health of your company is a must and working with competent
advisors and strategic partners who can help improve financial
performance is highly recommended.
Undergoing
a personal financial planning process is recommended for cultivators
as well. While personal and company financials are often highly
intertwined for smaller operators, knowing where you stand
financially can help inform your business decisions. For those in a
stronger place financially, investing in infrastructure and
continuing to fight the fight may make more sense.
For
those struggling on a personal level, closing up shop and entering
another profession with benefits and a retirement package is likely
the prudent choice.
Farming
ganja was highly profitable for years. Many people in the Emerald
Triangle stacked millions of dollars over the past decades, but that
is more challenging these days. Managing your company prudently,
upping quality and production, and creating winning business
relationships will separate the winners from the losers.
Authenticity, storytelling, connecting with consumers and retail
partners, and product differentiation are necessary to survive and
thrive in highly competitive markets. Take steps each day to improve
your performance, create new relationships, and learn new skills.
While getting out there and exposing yourself to new ideas and
potential rejection can be scary for some, it’s necessary in
today’s business climate. Go get yours!
I am rooting for us all, Much love, Jesse
Jesse Duncan is a lifelong Humboldt County resident, a father of six, a retired financial advisor, and a full-time commercial cannabis grower. He is also the creator of NorCal Financial and Cannabis Consulting, a no-cost platform that helps small farmers improve their cultivation, business, and financial skills. Please check out his blog at, his Instagram at jesse_duncann, and connect with him on Linkedin.
