As the leaders of High Desert Flower, a vertically integrated cannabis company based in Oregon, we have built a cannabis cultivation operation and merged with an extraction company. So, when we made the decision in 2019 to venture into retail and buy a dispensary, we asked ourselves, “How hard can this really be?” You don’t have to worry about introducing contaminants into a sensitive and tightly controlled cultivation environment, nor do you have to busy yourself with meeting the safety standards required of running an extraction lab.
The answer? Hard, but a different type of hard.
We closed our first dispensary purchase in June 2021, completing our vertical trifecta. Our goal is to eventually buy or open multiple retail locations, but we wanted our first dispensary to be our “starter dispensary,” so that if we flubbed integrating the store into our company’s operations, the damage would not be too large. Therefore, we targeted a purchase where the price of the business and license was heavily weighted to the value of the license. Our logic: assuming a continuing market demand for retail licenses at or above the current market price, the guaranteed value of any retail cannabis business is the value of the license, because if all else fails, we could at least sell the license at cost. Anything above that license cost (physical location, assets, etc.) we considered risk because there’s no guarantee that we would make that back.
So, a valuation that skewed heavily toward the value of the license seemed to be the safest path. Being risk-averse individuals (yes, there is irony in saying this within the cannabis industry), we spent approximately two years looking for and closing on the right purchase.
Having a retail outlet allows us to develop branded products for sale to both our own dispensary as well as others. This allows us to capture retail-level profit margin on some of the product we sell at our dispensary, given we created the product and didn’t have to buy from an intermediary. So far, we have developed products under our grow label and our extraction label. This was another risk-averse strategy offering more downside risk protection.
Here are 10 tips, lessons, and takeaways we have learned from the process (so far).
1. Leverage your retail to increase your cultivation’s cash flow.
Going in, we knew having cultivation and extraction capabilities would give us advantages for survival. The lesson we learned is that the advantages of vertical integration were more than we anticipated.
By owning a retail vertical, you can deliver your own product to the dispensary and not be put on a payment schedule. That is invaluable when first opening because you don’t have a sales history or a good prediction on monthly cash flow. What cash flow you make on your own products can be used to pay supplier payables, even if the suppliers’ products are selling at a slower rate than anticipated. There’s nothing like establishing good credit out of the gate.
2. Do not take labor availability for granted.
We opened our store about the time other businesses, including non-cannabis businesses, were ramping up their (COVID-related) re-openings in mid-2021. This put a squeeze on labor, and we are still working through staffing our dispensary with good people. Also, wages have spiked for a variety of reasons, and figuring out the right mix of staff at what pay levels is an art and a science. We tried every method of employee acquisition we could think of. We reached out to industry colleagues, approached people in retail businesses who impressed us with good customer skills, and are currently cross-training internal employees to cover shifts in case of emergency staffing needs.
3. Plan for exponential, not linear, logistics growth.
Integrating a dispensary—a third leg of the stool–is more complicated than we thought. Metcalfe’s Law, often used in telecommunications, states that the value of a network equals the square of its members. Think telephones and Facebook. One telephone or one Facebook member is not valuable; there must be many to create a network.
We have discovered a complementary law in cannabis, the flip side of Metcalfe’s Law that we call the “Vertical Complication Law.” In essence, as you add a vertical, the company gets more valuable. On the flip side, for every vertical you add to your enterprise, you exponentially increase the management complications of your organization. Telephone networks increase value because each extra phone is adding a homogeneous unit. Adding a vertical is still adding value in an increasing manner, but with added complications because the verticals are not homogeneous (i.e., not all of one type, retail for example). However, if you can successfully manage these complications with the proper systems, processes, and controls, then you exponentially increase the value of your enterprise.
We had started with a grow. We added extraction. This became a little more complicated, but we kept separate books and had separate Metrc accounts. Now we’ve added a dispensary with its own Metrc account while also receiving product from the other two verticals as well as outside suppliers. Now we have a much more complicated accounting and logistics landscape. Grow = 1 vertical, so the square of 1 is 1. Grow + extraction is 2, so the square is four. With dispensary that makes 3 squared, which is 9 on the Vertical Complication Law scale. In short, manage the exponential problems well and you will create exponential value.
4. Have an advertising plan in place.
When we officially opened, we concurrently ran a local radio ad campaign for a week and ran ads in two publications that published weekly. We even tried hiring people who “spin” signs in the front of our store to catch the eye of drivers. When people came in and mentioned the print or radio ad, we felt the advertising investment was worth it. But by far the best source of customers have been referrals from other customers, some of whom originally found us via ads.
We are still figuring out what mix of advertising and specials will build traction in our store, and we are also slowly getting a profile of who our customer base will be. This will allow us to turn our marketing dials to best enhance foot traffic and revenue and, at a minimum, will give us some sense of control.
5. Build good relationships with suppliers.
Vendors can be helpful in getting you off the ground by providing a wide variety of products at decent repayment terms. New dispensaries are risky for suppliers, but they know if their products get sales traction in our store we will regularly re-order their products. Though decent terms are not a given, you should ask for them. Vendors are often anxious to expand their own market share and secure shelf space, and they will normally waive minimum order sizes for new customers or even offer consignment transactions, where you don’t pay for the product unless it sells. If you have a good reputation in the industry for paying vendors on time in your other verticals, and you have dealt fairly with other cannabis firms when problems arose in the past, this goodwill will benefit your dispensary via the halo effect. Because of its federally illegal status, the cannabis industry is really dozens of separate industries across the country, and therefore small, even for a large state like California. We operate in Oregon, which has one-tenth the population of California, and bad reputations travel fast.
6. Be prepared to replace the point-of-sale (POS) system you inherited from the dispensary purchase.
If the POS doesn’t serve your needs, do not waste your time bending over backward to accommodate the system. Pull off the band-aid and replace the system as soon as possible. If you wait too long, your staff will build up habits and skills on one system only to have to spend valuable time learning another system. This is the danger of out-of-date software: you might as well be incorrectly training your employees from the start, so it’s best to avoid it altogether. Your first instinct may be to wait until you have ramped up revenue to commit to a new POS system, but the time spent training and transitioning current employees will not be worth the inevitable mistakes that will occur during the switchover.
7. Word of mouth is still the best advertisement.
Within days of opening, we were getting referrals from our repeat customers. As strange as it sounds, we had some of our initial customers come back more than once during the first week of our opening. We make it a point to ask customers to please refer us to family and friends. There is a strong analogy between dispensaries and restaurants. Give a great customer experience at a fair value, and you’ve won half the battle.
8. Be liberal with the swag giveaways.
Let’s say you spend $2,000 on 250 shirts and hats. Give them away as handouts or tie them to product purchases (i.e., spend a certain amount and get a hat). This helps your customers become your brand promoters.
9. Treat each customer as an ambassador for your store.
Whether a customer buys a $2 preroll or spends hundreds of dollars, they are your link to other customers. Think in terms of the lifetime value of a customer instead of the value of the transaction. And value from a customer can come from the products they purchase as well as the referrals they give out.
10. Integrate delivery into your operations.
This will be key to our future. The COVID-19 pandemic has dramatically sped up what customers expect in service. Also, given Amazon now does same-day delivery throughout many parts of the country, customers expect all businesses to provide the same level of service. Our license allows us to deliver locally and, though we have not yet implemented delivery, it is a high priority for us, and we are evaluating which delivery services to integrate into our system. We are going to start by trying a third-party delivery service. This gives us instant capability with no upfront costs, such as a dedicated delivery vehicle, additional insurance, and vehicle maintenance costs. We will reevaluate in the future to determine if the third-party approach, given realized sales, is cost effective.
Wider Implications
There are many more lessons and tips that could have been included, but if you get these basics right, you will be well on your way to success. An overarching takeaway from our experience is that we now have a tangible playbook on how to integrate future dispensaries into the company. It is one thing to have one or two dispensaries and only be in retail; it is quite another to simultaneously build multiple verticals within the cannabis business. And every company must forge their own path forward.
