Highly Regulated

Experience in the financial markets prepared the Cresco Labs founders for success in cannabis

Navigating the complicated web of rules and regulations that govern the legal cannabis industry can be daunting for most people. But not Charlie Bachtell and the management team at Cresco Labs, an Illinois-based company with operations in Pennsylvania, a license in Puerto Rico and plans to move into Arizona, Nevada and the Canna-Hub campus in California by year’s end.

Bachtell comes from the finance world, specifically home lending. More specifically home lending at the end of the last decade, just after that industry helped tank the global economy.

“When you’re identified as the cause of the worldwide financial collapse, needless to say, regulation starts flying at your industry from all directions,” he says.

Three of the four founders of Cresco previously worked together at Guaranteed Rate, a home mortgage lender in Chicago that not only survived the economic crisis but thrived at a time when droves of other lenders failed. Guaranteed Rate grew from 250 employees in 2007 to 3,500 in in 2015, all through one of the most scrutinized times in the history of lending. The home mortgage industry is considered a primary cause of the economic collapse due to subprime loans and the bundling of that debt. Following the crisis, Bachtell says the scrutiny from new laws and regulations routinely placed up to 12 auditors in their offices for 12 weeks at a time.

“Dodd-Frank put a big, federal regulatory agency in place to govern banks and when I left Guaranteed Rate I was one of five attorneys in the country who had been through two Consumer Financial Protection Bureau examinations,” he says. “It makes some of these arduous applications in the cannabis industry feel a little less arduous.”

Bachtell and his team have now been through several of those arduous application processes. The Cresco team submitted three of the 158 license applications for the 21 available licenses in Illinois.

“We ended up getting the highest score, the second-highest score and the third-highest score,” Bachtell says. “Then we knew ‘maybe this is something we should do.’”

Pennsylvania’s medical marijuana program began as oil-only, which Cresco CEO Charlie Bachtell says helped redefine cannabis and what it can do for patients.

PROGRAM BUILDING AND PARTNERSHIPS

Bachtell never saw cannabis as part of his career path, but over a one-month period in August 2013, multiple signs seemed to be calling him.

First, the Illinois governor signed the law legalizing medical marijuana, which fascinated Bachtell from the perspective of regulation and compliance. A week later, Dr. Sanjay Gupta’s medical marijuana documentary “Weed” aired on CNN, opening Bachtell’s eyes — and the eyes of millions of other Americans — to the medical properties in cannabis. Before the month was out, the Cole Memorandum was issued, providing federal guidelines for state-legal cannabis operations.

“I jokingly tell people I didn’t stand a chance,” he says. “I couldn’t possibly not do this.”

Today, Cresco is one of the biggest, multi-state names in medical cannabis on the eastern side of the country, capturing about 25% of the market share in Illinois. In Pennsylvania, the company received the second-highest application score for a grower/processor and is one of five companies allowed both grower and dispensary licenses for its southwestern Pennsylvania operations, Cresco-Yeltrah.

After thriving in Illinois, where the company has two 40,000-square-foot indoor grow operations and a Nexus hybrid greenhouse, Bachtell says it made sense for the company to look to other emerging markets to try and duplicate its initial success.

“We looked at Pennsylvania as another high-regulation, compliance-focused, limited-license, merit-based-application-process program,” Bachtell says. “But in these new, from-scratch medical markets east of the Mississippi, you’ve got to throw that program on your back and build it. Nobody will build it for you. They (patients) will not just show up.”

Bachtell says the company learned that state officials often look for a “nice blend between local involvement and professional experience.” While working on the Pennsylvania application, the Cresco team connected with a local group looking to get into the cannabis business. That group was led by members of the Hartley family, one of the most influential industrial families of the region and owners several local businesses. The groups combined their efforts. In fact, the “Yeltrah” in “Cresco-Yeltrah” is “Hartley” backwards.

“They’re an established family that has been doing business in southwestern Pennsylvania for 40, 50 years,” Bachtell says. “They’ve employed hundreds if not thousands of people over the decades. They have relationships at the local level and that is a giant component of our application approach — make it a community project, not an out-of-state company coming in.”

Bachtell says the partnership proved to be the difference-maker with lawmakers in Butler, where the company opened its first Pennsylvania dispensary.

“Meeting with Butler county officials and Butler city officials, they literally said, ‘We would not have done this until the Hartleys approached us about it. And if the Hartleys are interested in doing it then we trust it will be done right in our community so we’re supportive,’” Bachtell says. “Then, as we told the state what we would do, we hit the ground running.”

By the end of summer Cresco expects to have 27,000 square feet of canopy growing in its Pennsylvania operation with plenty of room for expansion as the state’s program grows.

FAST GROWTH

Cresco received its Pennsylvania licenses on June 20, 2017 and got to work retrofitting a 46,000-square-foot building to support its grow operation. Product began hitting shelves on Feb. 15, 2018, the earliest of any dispensary in the state. The first two phases of the buildout have been completed and Bachtell says the company will have 27,000 square feet of canopy by the end of summer 2018 with an additional 10 acres available for expansion. Bachtell expects to need the additional land because of the limited number of cultivation licenses available in the Keystone State (24), which has the sixth-largest population in the country and has already registered nearly 20,000 patients.

“If you think three to four years down the line, that patient population is going to require pretty significant capacity,” he says.

Bachtell credits the state with creating a good structure for the program and the expediency with which it is processing patient applications. He even says the decision to launch as a non-flower, oil-only program allowed for the type of patient education that pushes back on decades of “Reefer Madness” style propaganda and stereotypes still all-too-common on the eastern side of the country.

Bachtell says the lack of flower started a conversation about ways patients can benefit from cannabis without having to smoke it.

“It helped force this conversation of ‘Did you know cannabis can come in a pill?’” he says. “It’s a lot more like Advil or Vicodin than it is like rolling a joint or Cheech & Chong.”

This spring, regulators in Pennsylvania announced patients would be able to begin purchasing flower by fall.

Cresco-Yeltrah’s new medical dispensary in Pittsburgh opened in June, the company’s second location in the Keystone State.

NORMALIZATION

Cresco’s experience in Illinois allowed the company to get its products to market literally weeks before anyone else in Pennsylvania, which Bachtell says should begin to create brand loyalty as the market matures and expands.

The company has multiple brands aimed at different sectors of the market. From its THC-focused “Cresco” flower and vaporizer brand aimed at consumers who are already “okay with cannabis” to the non-combustible pills and topicals of the “Remedi” brand to its “Reserve” and “Mindy’s Edibles” products, Cresco Labs focuses on making quality products that appeal to a broad demographic.

Pennsylvania, however, does not allow edibles so the Mindy’s line, a partnership between Cresco and James Beard Award-winning Illinois pastry chef Mindy Segal, has not yet launched there.

Cresco grows its cannabis in what Bachtell calls “the perfect blend” of soil and soilless mediums, a proprietary mix of things like perlite and worm castings, however he says the majority of nutrients are delivered in a water-soluble form from an automated fertigation system, which provides a precise dosage to each plant. The company also eschews the typical “master grower” profile and instead hired as its director of cultivation a scientist with an undergraduate degree in agronomy and a master’s in horticultural science.

“We’ve implemented what we can take from traditional indoor agriculture greenhouse technologies and married it with what our team has developed as a cannabis cultivation operation,” he says.

But while Bachtell says the growing techniques are important, the company’s success comes more from its branding and the consistency of the product.

“The only way that this industry becomes a $50 billion industry is by cannabis becoming normalized,” he says. “It doesn’t become a $50 billion industry by everybody who already consumes cannabis just continuing to consume more. It’s new people coming into the industry.”

Cresco works to achieve that with its mainstream approach to branding, instead of relying on cannabis stereotypes.

“I want it to look at home on the shelf at Whole Foods,” he says. “It looks like coffee, it looks like wine, it looks like craft beer; it looks like things people are used to seeing.

“That’s what the future of this industry looks like.”

At Cresco’s indoor facility in Pennsylvania, the company grows in a soilless blend and delivers nutrients through an automated fertigation system, designed not by a “master grower,” but a scientist with a master’s degree in horticulture.

LESSONS LEARNED

More than anything, Bachtell credits the company’s success to the lessons he and the rest of the founders learned prior to joining the cannabis industry, calling the experience in finance “irreplaceable.”

“You had to be incredibly versatile and you had to be able to take a beating,” he says of those difficult years at the end of the first decade of the 21st century. “We talk about that a lot.”

Bachtell says he learned that you can deal with adversity in two ways: either you can cry in a corner or you can come up with a solution and push forward.

“I think we learned a lot by going through that from 2008 to 2015 and seeing the success that can come from an unreasonable or unrealistic level of engagement,” he says. “It’s that experience in knowing that if you engage fully enough, you can make things work out your way.”

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