Staking your claim in the crowded California cannabis market is one of many challenges that exist for operators throughout The Golden State.
Lowell Farms, a Salinas, Calif.-based craft cannabis cultivator, recently became the largest seller of packaged flower in the state, according to Headset data, with 3.4% market share during Q4 2021. Sales were driven by Lowell Farms’ two flower brands, Lowell Herb Co. and House Weed.
George Allen, chairman of the board for Lowell Farms, sat down in this exclusive interview with Cannabis Business Times to shed some background on his company’s success, his perspective on the California market, and his vision for the future of the cannabis industry.
Zach Mentz: Lowell Farms recently became the largest seller of packaged flower in California at 3.4% market share, according to Headset data. How did Lowell Farms reach that milestone in becoming the largest seller of packaged flower in California?
George Allen: There's three legs to the stool there. The first is having high-quality product, and I'm grateful for our team. You can't do it without having good product, and I think we've got a really solid grow team as well as a growing environment in our facilities. We've invested a lot in our facilities. Number two is you can't get anywhere without strong relationships with dispensaries. I think that that is a really pivotable aspect of the business, because while your ultimate customer is a consumer, you don't get a chance to have a dialogue with the consumer unless you're on the shelf in the store. So, that's obviously really important to us. And number three, frankly, is value. Sixty-two percent of cannabis consumers smoke at least once a day, and that consumer is very price conscious, and we work really hard to give them that exceptional value for their money. Those are the three things that we build our business around.
ZM: How important is it to build relationships with dispensaries and retailers? And how do you do that? How does a craft cultivator build those relationships and find their way on the shelf?
GA: We don't have dispensaries of our own, so we count entirely upon our dispensary partners to sell our product. And to be honest with you, the dispensaries value a lot of the same things consumers value, but they also value some aspects that the consumer may not be so aware of. Those are things like service, and reliability, and accountability, and responsiveness. So, we build a customer-facing team that is really focused on making our dispensary partners feel like they get access to us at any time they need it, and they have 100% transparency into decisions we're making that affect them.
The reality is shelf space is acquired over time – dispensaries never move quickly on shelf space – and it's a dialogue that's entirely predicated on trust. You build trust with dispensaries by doing what you say you're going to do. And the more you do that over time, the more they learn to trust you. Obviously, sell-through on dispensary shelves is important, so they need to see your product move. But before you even get to the chance to have the product moved, you've got to get it into the stores. And the way to do that is to be a good, reliable partner to stores.
ZM: What are some of the challenges Lowell Farms faces in the crowded California market, and how do you overcome those challenges?
GA: Well, California is crowded and for sure there's a lot of competition, but the bigger challenge that we face is competition from the illicit market. And the illicit market in California is sort of the silent hand that really dictates an enormous amount of consumer behavior. And frankly, California is not alone in this. The entire cannabis industry at large has a sort of tenuous relationship with the illicit market, and California is no exception to that. Whenever you combine a relaxed policy enforcement with a high tax regime, what you get is a fair amount of circumvention, and that's really what the illicit market is all about.
I have no philosophical issue with people who have historically grown cannabis and made their lives around cannabis, but it is very hard to live in a world that has two sets of rules. And that's what we have today in cannabis, which is a high tax regime for those operating on the legal side of the market, and you have relative impunity for those operating on the illicit side of the market. And what that means is … most cannabis consumers are being trained in America, and certainly California's the epicenter, that they can find better, or at least less expensive, weed on the illicit market. And once that happens … and sort of becomes cemented in consumer behavior, it's very hard to undo.
So, we're headed very quickly to an ontological moment where we have to decide as an industry, what are we going to do about that? Honestly, the answer that I think is most prevalent is to eliminate a lot of the taxes to try to bring parity between the illicit market and the legal market. That’s what California is trying to do right now … and I think once California gets that right, if they make the right decisions, they're going to be a lighthouse beacon for other states because the issue is even more exacerbated in other markets. Other markets have much more expensive, legal weed, and illegal weed, which generally comes from places like California, is all the less expensive. The advantage that the illicit market has in higher price markets is even more dramatic. That is not my problem – that is everybody's problem right now in cannabis. Most of what I think is the tremendously disappointing earnings season that's coming out of cannabis right now, where you're seeing growth deflate across the board, I think you can trace back to the illicit market. …
And so, I think we're seeing that across the industry. It's not getting enough discussion, but it will over time because we’re facing the risk of making legal dispensaries sort of a wholesale novelty and reducing them to that funny thing where very are few people go to, where most real weed smokers will go to their traditional illicit market. That’s our challenge. I think California is actually the best positioned for that challenge if they do the right thing on pricing and taxing.
ZM: So, how exactly does the legal market combat the illicit market?
GA: Well, the only way you do combat it is really only two vectors, one of which is almost immediately disqualified. The one that's disqualified is putting people in handcuffs, and I think we've all learned that is not a viable outcome because there's very little political will for criminalization of cannabis. Granted, it still happens … but it is going be harder and harder to follow that agenda politically.
There's almost like a twisted incentive structure, because they're still handing out licenses to people who manage to get themselves arrested. It almost works [to] your advantage to participate in the [illicit] market because you have a better chance of getting a license in the legal market with a criminal track record. Now all of that is well intentioned. It's all very well intentioned. So, I think for that reason, it almost entirely disqualifies law enforcement.
So, I think you've got to go the route Canada went. I think Canada's really informative when you look at how they have done it. They basically have zero (illicit) market in Canada. The reason they have zero (illicit) market in Canada is not because they they're putting people in jail, it’s because the legal market in Canada, countrywide, is incredibly price competitive with the illicit market. And the reason they get there is because number one, competition, [and] number two, the state takes an active role in distributing products and therefore reduces a fair amount of cost in the system. Those two things really drive the country to have almost entirely eliminated illicit markets, while the consumer gets everything they wanted, which was good value for their money. I think that's the way we got to go.
One challenge California does have is retailers tend to take more of a markup on products. A lot of that has to do with the additional tax burden that occurs from 280E. So, the long-term future here has to be getting prices down and reducing that burden on the industry. And when you do that, the consumer will vote with their feet and they'll go where they see where they see good value and selection. But until [we] bring the cost competitive with the illicit market, you're looking at basically two different markets operating side by side, one of which is laughing at the other.
ZM: What specific changes would you like to see to California cannabis regulations? How would these changes help improve the market and industry?
GA: One easy, easy, easy way that Canada has taken costs out of the system that we don't even talk about in the United States is mail-based fulfillment. Once you allow mail-based fulfillment for cannabis, all of the efficiencies that we benefit from in the broader economy from an e-commerce-based paradigm, all of those start to shift over into cannabis. And right now, nobody's talking about it, and it's actually quite simple why nobody's talking about it – because the federal government runs the mail system in the country, and until there's a shift in federal treatment of cannabis, that won’t happen.
If you watch Amazon, they’re not participating in this cannabis legalization initiative out of just the goodwill in their heart and out of the sanctity of their employees. They know where this is going. And they know they are probably the only real answer, or at least large-scale e-commerce is probably the only real answer, to thwarting the [illicit] market system that's out there. So, I think ultimately the death punch to the [illicit] market is going to come from Amazon, which is going to go and tell the individual constituents, ‘Look, we can solve your problem here by making it more competitive for the consumer.’ And I definitely see that in the future, but the timeline … I’m not sure how far out that is.
ZM: Are you saying that you can picture a world where you go on Amazon not just to get groceries or home goods, but you're ordering cannabis through Amazon or a similar platform?
GA: Why not? It's a phenomenally easy product to mail. It's far easier to mail than liquor is. Liquor has a weight and shipping issue that you don't have with cannabis. So, 100%, that's where we're going. If you really want to take costs out of the last mile of fulfillment, that's really the only way to do it. Right now, you're running an extremely expensive last mile network in American cannabis, because not only is it retail, which is proven to be more expensive for every industry, but it's retail saddled with just a ton of regulations – cameras here and security guards there, and certain rules and regulations all over the place. It's just one handicap after the other. So, if there's ever an industry where the margins are just completely ripe, [it’s cannabis], and this is why Amazon's interested in this. They look at it like we've never seen a fatted cat that looks as enticing as the cannabis industry because the actual product margins are enormous over what the consumer pays at retail.
ZM: So, if the cannabis industry were to go that route and delivery became just the norm, what does that mean for dispensaries and retail operations?
GA: Well, I think there's always going to be a place [for retail]. E-commerce exists in Canada, and at the same time there's a fairly healthy, competitive network of retail dispensaries. So, the consumer has choice, but you can imagine, for example, the margins that Canadian operators operate on at retail is closer to 30% versus 60% in California for retail. The reason for that is that e-commerce provides basically a price ceiling for retailers, because if I try to charge more than the e-commerce alternative that happens to be run by the government or the provinces in Canada, I can't charge more than they charge because the customer's going to walk out the door, order online and send it to their home.
There's a healthy competitiveness there that is created by the e-commerce alternative. I just think it means that consumers will have choice, and there'll be a percentage of purchases happening in-store and a percentage of purchases are happening online, pretty much like the rest of our goods.
ZM: If tomorrow you were in charge of the U.S. cannabis industry, what would be your first move and why?
GA: I think interstate commerce, tax normalization, and mail-based fulfillment for e-commerce. That’s what I would do, those three things. If you did that, the illicit market would vanish in a heartbeat and consumers would be guaranteed low cost, clean product, and the government would have a viable base for levying taxes on a much broader base. And so, their tax receipts would go up even though they're reducing taxes. Unfortunately, it would probably mean that a fair amount of brick-and-mortar investments wouldn’t necessarily be as profitable, but I think it would collectively be better for the entire economy.
ZM: Looking forward, what opportunities for Lowell Farms and/or this industry most excite you?
GA: Well, I came to [Lowell Farms] because of cost leadership and quality leadership. Both of those things brought me to [Lowell Farms]. (Editor’s Note: Allen previously served as president of Acreage Holdings before joining Lowell Farms in April 2020.) What we built in Lowell Farms is entirely the result of the opportunity we have for both cost and quality of leadership.
I believe that smoking cannabis in its raw flower form … the consumer has spoken – it is by far the best way to enjoy cannabis. There are definitely other uses for other methods, but we have largely thought for a long time that cannabis was going to shift over to form factors that were less offensive. Smoking, for a long time, was a four letter word. So, we thought for a long time we were going to see a shift cannabis edibles, beverages, all that stuff. And I think there's a role to play there.
But from what I see, the cannabis consumer really is telling us there's nothing that comes close to smoking cannabis in its raw form. And I personally am building a business that is really focused on making prerolls more accessible to the consumer at a cost that’s fair. The consumer wants to smoke flower in its raw form, and prerolls are a convenient vector to do that. But so far, they're too expensive, so we're very focused on getting costs down for prerolls. We think that's the winning form factor and that's the brand that we're building around.
Editor's Note: This interview has been edited for length and clarity.