By Greg James
Déjà vu might be a good way for me to describe what I see going on in the recreational marijuana world. In the mid ‘90s, my publishing company (then called Countertop Video) made the move from VHS distribution to CD ROM publishing. And, with some expert help and advice from a former Costco software buyer, we jumped into the fray. The CD ROM business was growing at breakneck speed, and everyone from Disney (Disney Interactive) to Microsoft to Simon & Schuster jumped in. Big and little companies competed to get product into Comp USA, Circuit City, Incredible Universe, Egghead and many other ‘90s retail chains. It was a time of huge growth, and a free-for-all “gold rush” mentality in a sexy new business.
Sound familiar?
What happened next was a textbook case of what not to do in a gold rush: The venture capital companies funded plenty of really bad start-ups with questionable business plans, valuations went sky-high on developers with little or no revenues, and those that did have real products agreed to crazy deals to get onto store shelves. The whole industry operated in a way that defied common sense and proven business practices. In short, it was lunacy, and few noticed.
At Topics Entertainment (Countertop Video’s new name), we were faced with a dilemma: Join the madness, and give retail chains like Comp USA $25,000 in “slotting fees” to get $20,000 of product on their store shelves (in theory you made your profit when they re-ordered), or sit back, practice smart business, and wait for the inevitable crash. We mostly chose the latter (with a couple of spectacular exceptions), and waited out the frenzy. It took a lot of discipline. I remember the day my CFO informed me that we’d lost money three years running selling to Office Max. He explained that even though we were shipping them $2-3 million worth of product a year, their high return rates, slow sell through and slotting fees always wiped out our profits at the end of the year. He was right. The numbers didn’t lie. We stopped selling to Office Max, Comp USA and Office Depot around 2006. All three were major accounts. All three were also money losers because of their terms. Our revenues dropped by nearly $10 million in the next couple of years, but at the same time, our profits took a solid jump upward. In the end, the lesson was clear: My CFO was right when he pointed out that losing money for the sake of growth in revenues and exposure was a terrible strategy for a company with finite cash. Today, Topics is one of the very few survivors from that era. Revenues are well below the $60 million peak we hit in 2005, but the company is still operating at a profit, and our focus on the bottom line saved us at a time when most of our competitors believed in growth at all costs.
The lessons I learned back then apply to everyone in the rapidly growing, and sexy new marijuana industry.
- Listen to your CFO/accountant, and if you don’t have one, get one. He or she will be much more valuable to your business in the long run than a “master grower.”
- Bad deals are bad deals, and the old joke about “we’re losing money on each sale, but we’ll make it up in volume,” still applies.
- Avoid getting sucked in by hype. If your competitors bite on stupid deals, let them. In the end, you’ll win by sticking to sound business practices. It takes lots of discipline, but you’ll be a survivor.
Incidentally, more than a year ago, I asked that same CFO, to review the rules and regulations associated with I-502 and legal marijuana. His conclusion: Success would come to those who paid close attention to detail, watched their overhead costs, and carefully managed capital.