While the novelty of adult-use cannabis stores remains at an all-time high for most of the country, legal weed has become commonplace in Washington, Colorado and Oregon. Extremely long lines have disappeared, prices have fallen to compete with — or completely undercut — the black market, and retail outlets have become just another fixture for many locals on their daily commutes.
After more than four years of recreational sales in Colorado and Washington, and three years in Oregon, long-standing retail operators have seen shifts in regulations, buying dynamics, consumer trends and competition. These shifts represent a wealth of opportunity for nimble business owners and a potential bloodbath for those reluctant to change, according to those who have survived the upheaval.
A Buyer’s Market
Since Colorado, Washington and Oregon launched their respective adult-use programs, the wholesale price of cannabis has been on a steady decline as supply has outstripped demand.
Perhaps nowhere has the trend been more evident than Oregon.
Matthew Price, founder of the Portland-based retail chain Cannabliss & Co., blames some of the state’s green rush problems on the influx of cannabis entrepreneurs, which transformed a burgeoning medical market into a competitive landscape of powerhouse producers, industry newcomers and everything in between.
“Oregon’s open policy for out-of-state applicants has set the state apart from other legal cannabis states,” Price says. “The market has changed tremendously. It’s become far more competitive, prices have dropped and the consumer base has expanded.”
During the first eight months of recreational sales in Washington, retailers faced a major shortage, while growers enjoyed artificially high wholesale prices, before the market value swiftly declined.
“The most significant shift we have seen in the market is pricing and availability,” says Aaron Nelson, the director of actualization for 2020 Solutions, a retail chain in Washington. “We have seen wholesale pricing drop from a high of $12 per gram wholesale to being able to sell at retail for less than half of that.”
Tedd Wetherbee, co-founder and owner of The Gallery, a chain of four retail cannabis stores in Washington, echoes Nelson, stating: “I think the rapid decline in wholesale-priced marijuana has been something that people didn’t expect to move so quickly. It’s a buyer’s market now and not a seller’s market.”
However, The Gallery isn’t competing to offer the lowest the lowest prices in the area. Wetherbee says The Gallery focuses on margins and working with producers who offer more than just flower.
“In this market you have people who think that selling low margins at high volume is going to get them somewhere. It doesn’t. You can’t sustain that model,” Wetherbee says. “They’re trying to choke each other out instead of pricing where they need to be at their margins and become decent competition.”
While in some ways Colorado has enjoyed more stability than Washington and Oregon, the constant evolution of the industry has forced businesses to stay flexible.
At Lightshade, a vertically integrated Colorado retail chain, CEO Steve Brooks and his wife, Shannon, the company’s vice president of marketing and corporate responsibility, have thrived in the tumultuous market. They started Lightshade in 2011 and watched the wholesale price of flower escalate steadily through 2015, despite a rising number of growers. Having migrated to cannabis industry from the homebuilding market, which infamously crashed in 2008, the couple realized early on that the flower bubble would burst. By 2016, the wholesale price had fallen 50% from the previous year.
“The market has changed dramatically,” Shannon says. “Ever-changing regulations, new, innovative products and consumption methods and continuous shifts in supply and demand, which affect price, make it very challenging to stay relevant and retain good margins.”
Lightshade has been gradually increasing its footprint over the past seven years. It currently has eight stores.
“There has been a lot of consolidation going on and there will continue to be in Colorado,” Steve says. “I think at the end of the day there could be 10 very large chains that will dominate the market.”
The Reality of Retail
By Patrick Wagner
After almost five years of watching the market take shape, Marijuana Venture publisher Greg James has seen the tides of the industry shift more and more toward retailers.
James has more than 25 years of experience working with major retailers such as Best Buy, Walmart, Costco and Sam’s Club (to name a few), and he quickly recognized that much of the cannabis industry remains light years behind traditional retailers in their overall expertise, leading stores to miss out on the opportunity for greater profit.
The former CD-ROM and software mogul turned magazine publisher shared his thoughts on the current state of cannabis retail.
Marijuana Venture: What lessons can cannabis retailers in newer markets learn from those who have been operating for several years in Washington, Colorado and Oregon?
Greg James: First of all, if you’re going to open a retail store, hire a manager who has experience in a non-cannabis, traditional retail operation. They will know what terms like MDF, POP and end cap mean. They will also understand things like inventory turns, margins, traffic flow, brands and vendor relations.
Know your model and customer and then get razor-focused on it. Costco, Walmart, Nordstrom, Banana Republic and Gap all sell apparel. However, they have very different models and consumers. Being good at retail means knowing what you’re trying to do. Costco has always beaten Sam’s Club because it is more focused on warehouse volume sales and spends more time researching locations and knowing its customer base.
MV: In your opinion, what are the pitfalls of vertical integration?
GJ: Vertical integration can help a business by allowing it to supply its own products. However, in most cases, vertical integration is bad for the buying public. In Washington, where there is no vertical integration, the variety of products is far bigger than in Colorado, the quality is better and the prices are significantly lower. In most other businesses, vertical integration is either not practiced because companies are rarely good at more than one core competency, or outright illegal because of monopoly fears. Disney isn’t allowed to own theaters and Budweiser isn’t allowed to own taverns. The reasons why are obvious.
MV: What positions within a retail company are critical for its success?
GJ: Good buyers. What I mean by that is buyers who actually know how to evaluate vendors and know how to pick products that are good for the customer and the store while also avoiding the temptation to buy from their “buddies.”
Most big retailers have very strict rules against freebies for buyers and anything that can influence their decisions. I heard of a buyer who was fired from Walmart for accepting a lunch from a vendor. In traditional retail, the buyer makes all decisions based purely on merit.
Along with buyers, it’s important to have good staff in the store. I remember the early days of recreational marijuana. A lot of the people behind the counter acted like they were way cooler than their customers because they worked in a pot shop. That seems to have gone away as store owners realized that a smiling face behind the counter is as important in a marijuana retailer as it is in a Nordstrom.
Price opened first Cannabliss location as a medical dispensary in Portland in 2010. In October 2015, it was among the first shops in the state to transition to adult-use sales. But that change also brought a shift in the buying dynamic between growers and retailers, particularly for companies that don’t produce their own cannabis.
“There were times that it was the growers who had the upper hand, but now the retailers have the upper hand and the buying power,” Price says.
One year after Oregon fixed a bottleneck associated with lab testing, a confluence of out-of-state cultivators and transitioning medical producers created the biggest surplus of cannabis in history, leaving growers at the mercy of buyers.
“Largely, I think the retailers have been trying to help the growers out,” Price says. “We’re not trying to gouge people because we know they’re in desperation mode, but you hear about it happening.”
Each of these retailers share a common thread in their business models: They all look to provide not just low prices, but a unique experience for the customer.
Marijuana Venture publisher Greg James, having witnessed and reported on the evolution of cannabis retail for the past four years, has seen this trend increasing, particularly in highly competitive markets.
“Retailers have had it a bit easier (than growers) because the barriers to entry were much higher and demanded a bit more planning,” James says. “Retail is evolving rapidly and many stores are now focused on becoming ‘shopping destinations.’”
When Lightshade first opened, they were crafted to provide a distinct experience, while maintaining its “mountain contemporary” style that fits with Colorado.
“It was very much a departure from what dispensaries were like seven years ago,” Shannon says. “We wanted to create cannabis from the perspective of a lifestyle product — not just about getting high, but how it can be used in health and wellness goals. We were thinking about women, and what would they want to see and feel when they walk into a dispensary.”
With each new store, the design was refined a little more, Steve says.
“We did a design overhaul last year to rebrand and keep old stores consistent with our new interior design elements,” Shannon says.
In Oregon, Price was fortunate enough to find several unique locations to set Cannabliss apart from competitors. The company’s “Sorority House” location in Eugene is a 1902 Victorian home with a spacious interior that was remodeled to elegantly house the retail fixtures. The building was added to the National Register of Historic Places in 1976; in Portland, the “Firestation 23” location was home to the city’s fire department in 1891. Price restored the location for Cannabliss and kept the fire pole running through the sales floor.
The Gallery’s stores in Washington have become havens for local artists and cannabis aficionados alike. As the name implies, The Gallery is both a store and a display space for many artists. Wetherbee says the design helped differentiate the chain’s first location from the surrounding unregulated — and ugly — medical dispensaries.
“It was very unregulated in the entire state, but Pierce County had no regulations for medical,” Wetherbee says. “Anyone with a storefront, a card table and a jar full of weed could sell marijuana. We were competing with that until July of 2016.”
Each of The Gallery’s locations rotate though various selections of artwork, but maintain a similar look and feel. Behind the counter, Wetherbee was fast to follow market trends to keep The Gallery stocked with consumer-requested products and adopt new technologies such as inventory software that would interface with the company’s online menus.
Keys for Success
After seven years in one of the most competitive market in the country, Shannon Brooks offers the following advice for cannabis retailers in California or those in new markets like Massachusetts: “I would say that you would have to have a lot of patience (and holding capital) to grow your business,” she says. “Hire well-educated, compassionate and reliable staff members. Be different than what is already out there.”
Shannon says developing an operations team has been critical for Lightshade’s success. The operations team manages the daily labor, processes, compliance and retail operations onsite. Additional support is provided from the corporate office to ensure the company’s long-term objectives are being met in a timely manner.
“Do not follow what others are doing in the industry. We have maintained our core values in how we run our business,” Shannon says. “This industry takes a lot of work, a strong backbone and a high tolerance for risk. Play by the rules and manage the business within the guidelines provided. Make sure that you have good people working with the company and treat them like family.”
At Cannabliss in Oregon, Price echoes Shannon’s focus on team building.
“These companies are made by the people they employ,” Price says. “Your managers are your eyes on the ground. As an owner you have to keep a 30,000-foot view and a lot of things can get lost. You need quality management on the ground-level to maintain that your store is operating to the letter of the law and to communicate the message of what needs to get done to the employees. The managers will make or break you.”
Price adds that access to professional services, such as attorneys and accountants, is paramount for a cannabis business to succeed in such a heavily regulated industry.
“If there’s one thing I can tell you that will keep the wheels on your business, it’s having a good accountant and legal services for keeping your books in order and getting good legal advice,” Price says. “When I say ‘good’ I mean pay for quality. I made that mistake and ended up with a pretty big mess from not having good legal services when I started the business.”
Nelson at 2020 Solutions warns retailers to “plan for just about everything to cost more than you expect.”
He adds that traditional job applicant screenings may not be enough for the cannabis industry.
“Plan for higher turnover than in other industries,” Nelson says. “Many applicants look at the opportunity as a job where they get paid to smoke weed or get free weed. It is important to screen out those applicants.”
Wetherbee says retailers should pay attention to the buying trends producers and processors are offering. He says some of The Gallery’s success is due to providing customers with the products they want in a unique atmosphere, while maintaining margins that can support the future of the business.
“We want to maintain a profitable business, not just keep the lights on,” Wetherbee says. “Clearly, we’ve seen some market leaders establish themselves in the retail sector, and by that I don’t necessarily mean the guys who are selling the most, I mean the guys who are branding themselves the best, creating a recognized company.”