Boutique Businesses – Can the small survive?

Under A Shadow

As big businesses steadily take over the cannabis industry, opportunities arise for boutique growers and retailers

By David Hodes

At one time, the cannabis industry was one of dedicated mom-and-pop businesses that would buy cannabis wholesale and sell it to patients at a dispensary storefront. It wasn’t that much different from other retail operations.

But the quaint origins of the industry have largely disappeared, at least for now. With retail chains becoming more prevalent, multi-million-dollar licensing requirements in some states, and commercial grow operations churning out incredible yields, what does the future look like for boutique cannabusiness operators?

The pros and cons of cannabis commercialization have always been an argument of quality versus quantity. Some say businesses that specialize and take advantage of economies of scale can be more profitable. Others argue that small-batch, connoisseur-level producers will always have a place in the market; the boutique businesses are prime to come roaring back, they say.

“There is an absolute gaping hole, in my opinion, for high-quality cannabis,” says Jan Carlos Byl, founder and managing member of MedCanna Consulting Group. “We are moving toward commercialization and moving toward an ag model now.

“That leaves the door open for the boutique producer, because quality will always trump volume — in anything,” he says (although shareholders of companies like McDonald’s might disagree).

 

Changing landscape

Bob Morgan, a cannabis industry consultant and attorney at the Chicago-based law firm Much Shelist, spearheaded the Illinois medical cannabis pilot program. He tracks mergers and acquisitions activity in the cannabis industry. Morgan says many of the early cannabis growers and dispensary owners are now in the early stages of planning their exits.

“Ultimately, we are likely to see a mix of mom-and-pop boutiques that evolve and mature, and others that entirely cash out of the labor of love that they have built,” he says. “State cannabis industries as old as California and as new as Illinois will continue to mature and force boutique shops to further carve out a niche in the market or form strategic partnerships.”

At this stage of the industry’s evolution, there are mergers and acquisitions happening among licensed cultivation and retail businesses, and ancillary companies.

“There have already been substantial acquisitions on the ancillary side, such as vaporizers, cannabis consulting and management companies, and edible brands,” Morgan says. “But the mergers and acquisitions on the grow and retail side have just begun.”

He believes many of the investments taking place now come at a critical time for the pioneer companies where the infusion of outside cash — or outright acquisition — makes sense for both the buyer and seller.

“Smaller shops looking to survive consolidations and increasing competition should give serious thought and planning to their next steps,” Morgan says.

Mom-and-pop businesses are not dead, but they are going to have to adapt in the long run, says Travis Howard, general manager and founder of Shift Cannabis Company, which provides consulting services to boutique cannabis businesses.

Howard says the industry, as a whole, needs the $100 million player in order to build the business infrastructure to allow more diversified companies to succeed.

Financial considerations are the main reason small businesses have largely watched from the sidelines or have gotten into and then back out of the cannabis industry, he says. It’s expensive to get into the game, and managing a profitable grow operation is complicated.

“In Hawaii, you have to have $1.2 million just to submit an application,” he says. The Aloha State recently selected eight winning applicants from a pool of about 60 contenders. (Among the non-winning applicants were actor Woody Harrelson and video game pioneer Henk Rogers.)

Operating a small business still means a more defined niche that customers can understand; companies that are small and don’t provide unique or specialized products will eventually go out of business, Howard explains.

“For every market, you have to provide something that a customer wants, and then get better at doing that,” he says.

 

Boutique success stories

The broader point Howard makes about doing business today, and for the future of a boutique business, is about listening to the customer, providing specific products they want, and educating the customer about both the product and the company. Modern consumers want to know why a company is in business, and how their business affects society and the environment. The potential for the boutique model to succeed is, in part, driven by millennials’ big-picture thinking about the world, Howard says. They tend to have a deep sense of distrust, but believe they can make a difference in the world, he says.

“They expect their retailer to be authentic, and give them a sense of community,” he says. “And that works for the cannabis boutique employer. You have a chance to hire and to scale your culture with a workforce that feels compelled to change the world. If you don’t leverage that, you are missing a great opportunity.”

That’s been the methodology used by artisan beer and food makers, clothing manufacturers and other companies that started as small businesses and have grown quickly. It’s why Kellogg’s bought Kashi, originally a small health food maker, and General Mills bought mom-and-pop organic snack maker Annie’s Homegrowns, Howard says.

“They see what is happening in the overall economy and where the consumer is moving to,” he says.

There are similarities between the cannabis and beer industries, where craft brewers produce more exclusive and more expensive products. Craft brewers, such as New Belgium Brewing Company from Fort Collins, Colorado, began telling customers their story. They highlighted sustainable methods and created an “us versus them” rivalry with the mass-produced brands like Budweiser and Coors. Quality was just one of the factors used to differentiate craft brewers from the multinational giants. Smaller businesses — whether they’re brewing lagers, growing cannabis or making specialty cupcakes — need to learn how to promote themselves. Howard believes people will pay more because they know and appreciate what they are paying for.

In cannabis, the multinational giant simply doesn’t exist — yet. The market is too new, and federal regulations against transporting marijuana across state lines prevent companies from becoming truly national. But it’s coming, and boutique business operators are wondering how much room will be left for them.

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