California’s cannabis industry demands a lot more from operators than simply knowing how to grow cannabis. It helps to have additional skills like accounting and supply chain logistics to rise above the competition.
Having worked on Wall Street and across Europe in private equity and global financial modeling, Desert Underground CEO Ethan Woods was well-prepared for the rigors of the cannabis industry beyond cultivation. Woods, who studied economics in college and spent a year studying food supply chains in 13 countries along the Maritime Spice Route, launched Desert Underground with his brothers in 2017.
At its 75,000-square-foot grow facility in Desert Hot Springs, the company focused on white-labeling cannabis for other brands while letting the recreational market mature. Now, after years of refining its own growing practices and helping build celebrity brands for Snoop Dogg and Mike Tyson, Desert Underground is ready to step into the limelight with its own products.
“What we’ve done for the past two years — and the whole point behind the Desert Underground branding — is that we were literally underground,” Woods says. “We focused on growing hundreds of different crops before we actually wanted to put our name out there. We’ve earned the right to put our own packaging out there and really stand behind our own product.”
Marijuana Venture: How did your career experience translate to cannabis?
Ethan Woods: I would say that supply chain, for me, is my core. But also focusing on really great product and product innovation is my core as well. I would have wanted to start producing tons of product out the door in 2018 but my better business sense said to focus and watch everybody else in the market. What we’re working on is the second-mover approach: learn from what those other guys did and try to build a better mouse trap when it comes to launching B2C brands.
Our proposition was that as long as we have product that outshines the competition, we think we could come up with a better packaging solution that connects with a broad array of consumers, as long as we’re listening to the consumer.
MV: How much did that play into the decision to white-label products initially as opposed to creating a Desert Underground brand?
EW: I have learned that with business it’s all about focus in the beginning, that if you add too much complexity then you will never do that one thing well. The one thing we really wanted to do well was grow cannabis. We watched a lot of other large-scale operators in California and multi-state operators start to invest in product lines and expansions before they even had a core product or even a reputation. And with 280E, you can’t write those costs off. It’s like a lead balloon attached to the business if you can’t get the consumers to believe in you directly out of the gate.
MV: It sounds like the wildfires in California are driving up wholesale cannabis prices? What trends are you seeing in terms of pricing?
EW: The overall market is up over the past six to eight months by about $500 a pound. My crystal ball is broken but my guess is that it is probably going to go up further, and it’s not just because of the wildfires. You’ve got COVID, and there were a ton of projects that got stalled out, and there was a ton of investor money that dried up this last year so whatever was going to come online this year is probably two years out now.
The other thing is retail expansion. We did have 700 retail licenses in 2019 but only 450 were operational. A lot of those became more operational in 2020 and as COVID was expanding you saw a lot of delivery start to come online, which can cross county boundaries and reach the 60% of municipalities that didn’t allow cannabis operations. Now, because of COVID and all these other small businesses going under, you are starting to see the other 60% saying, ‘Well, we can make $300,000 in tax revenue if a dispensary opens up so why don’t we roll out some weed legislation.’ So retail expansion is huge right now.
MV: How does Desert Underground grow its cannabis?
EW: We grow with high-pressure sodium lights. We also have some ceramic metal halides. We will be transitioning to doing LED tests over the next six months to set up for a future facility that will be larger in scale, scope and size.
We grow in coco-coir. We currently use real coco that comes in a pellet-type bag, which seems to be working really well for us. We use a mixture of hand-watering and auto-irrigation for the best results.
We optimize our nutrient profiles for each strain, and we use a scientific method to arrive at that. We are data crunchers. We have QR codes on every single bench in both facilities, and we link all of our irrigation and pest management data back to a centralized database so we can constantly have our hands on the flight controls and set tolerance levels so if you go out of bounds for even a second you know exactly what to do to get back.
MV: How did the company overcome the challenges of growing in the Sonoran Desert?
EW: At the core of it, the desert makes you sweat sometimes. It got up to 122 degrees this past summer. When we were doing the initial design of these facilities, we had to take into account that there was going to be this max heat load during the summertime that factored into the level of insulation that goes into the walls. It factored into the rating for our HVAC systems. When the sun shines on the wrong wall, it will disrupt the convection currents in the room and you’ve got to monitor that airflow constantly because you could have something pop up like powdery mildew or botrytis.
We had to put a ton of HVAC in there and dehumidification and we had to make sure these things are locked tight. You might think there’s a low level of pest pressure in the desert, but this is not totally true. We get 60 mph wind gusts, and if that door is open for too long and there’s no quarantine zone, then you just let in eight pests and ruined crops for three months.
MV: What have you done to ensure Desert Underground’s production methods are scalable?
EW: We have in place what we call a professional garden, which means we take down three harvests every single week. To do that, you have to preplan one year in advance and set up your mother stock so that you are properly meeting the production schedule. What that allows us to do for our customers is say, ‘I can tell you exactly what is going to come down eight months from now, and I can tell you within a degree of freedom exactly how many pounds of premium, small, trim, shake or whatever, so you can actually plan for your launches,’ because we know exactly what our run capacity is for the next year.
MV: How did you decide what to grow so far in advance?
EW: It’s weird, it’s almost like fast fashion. People smoke what they want and that might change in three months. It’s not like The Gap or Banana Republic, where 12 months from now you can forecast super well. We have a screening process we go through where we work with the consumers, the people on our team and our B2B clients, and we try to find the best strains that fit the current market profile of the consumer. And we do some consumer segmentation on that side as well. We then match all those data points together.
We hired a really solid head of brand development. We studied the data from New Frontier, BDSA and Pistol Data to look at what these other brands are doing and how they are able to maximize the proposition for the company, and we determined that we were going to put together more of an infrastructure where you have Desert Underground as your lifestyle brand that will have its own products, merch and lifestyle components to it, but beneath that you will have your sub-brands that help to maximize the consumer proposition.
MV: What are the next products you’re looking at launching?
EW: Screaming Trumpets came out in November, and we’ll have some line extensions with that. We are going to be doing 10-gram tins, 20-gram small bags and we’re going to do kief pucks as well. Those are all coming out over the next three months. We are starting to look at what products we can launch under Desert Underground itself.
We don’t know what that is yet but it’s probably not going to be an eighth in a glass jar like every other person on the market. We are going to find the blue water, and we are going to put together some really innovative stuff that might play with terpenes or the overall entourage effect or cooking SKUs.
This interview was edited for length and clarity.