Is the Cannabis Industry Focused on the Wrong Metrics For Success?

The progression of the cannabis industry during the past six years reminds Lume Cannabis Co. CEO and founder Dave Morrow of the classic “The Tortoise and the Hare” fable.

Many cannabis brands have been focused on speed—getting on the ground floor in as many states as possible, a strategy to be among the first to receive highly coveted and an often limited number of licenses. Because cannabis is still federally illegal, becoming a multistate operator, despite the challenges of navigating the labyrinth of constantly changing rules and regulations and the expense of replicating supply chains, was also one of the only options for companies to establish national brands. The importance of first-mover advantage is often noted.

But Lume’s comparatively methodical and tortoise-like approach, with a focus on longer-term goals, will serve the company well in the end, Morrow says.

The acronym MSO may be ubiquitous in the cannabis industry, but Morrow argues that it’s not a metric for success. What matters most is a business’s ability to first create products consumers love at reasonable prices, and then to scale. He names many examples. Starbucks was just a single store in Seattle long before becoming a global brand. Lululemon started in Vancouver in 1998 before it became a household name in athleisure wear. And La Croix was founded in Wisconsin more than 40 years ago before becoming one of the most popular and well-known brands in the sparkling beverage category, which has exploded in the past decade.

“You’re not going to come and say, ‘How many states are you in?’ At the end of the day, that doesn't give me any indication on your ability to create innovative units at scale,” Morrow says. “But when this term MSO came out, everyone was like, ‘Oh, they're an MSO,’ ‘I'm an MSO.’ I'm like, that's ridiculous. That doesn't mean anything. That doesn't tell me anything about your business.”

Morrow has been an entrepreneur since he was a junior at Princeton University. A champion lacrosse defenseman and 1993 National Player of the Year, he began building what would become Warrior Sports, a global provider of lacrosse and hockey equipment, footwear and apparel, while he was still a student and athlete. It all began from an idea Morrow had to make lacrosse sticks using more durable titanium instead of aluminum. Twelve years after he founded the company, New Balance acquired it. During his tenure, he amassed about 70 patents, and he continued serving as CEO of Warrior until January 2019.

That’s also the year he launched Lume Cannabis Co., a vertically integrated cannabis company with both indoor and outdoor cultivation operations and 38 dispensaries across Michigan. In four years, the company has grown from $2 million in revenue to nearly $200 million. And the way the company did that, Morrow explains, was by focusing on producing the best product at scale to provide the best quality and price for the consumer, just like many other consumer packaged goods.

Often, plant-touching cannabis companies focus on price per pound and how many states they’re operating in, which aren’t the most important metrics for success, he says.  

“In the business of consumer products, whether you're selling cannabis, yoga pants, running shoes, it's how many units do you sell and what's your average selling price per unit? Your ASP," Morrow says. "And that conversation is the crux of every CPG company.”

Over time, Lume has carefully expanded and optimized facilities. The company’s story is featured on the cover of the January/February issue of Cannabis Business Times, and details Lume’s journey to building a 250,000-square-foot, highly automated cultivation and processing facility in Evart, Mich., increasing its outdoor production from 70 acres to 120 and growing its retail footprint.

In mid-February, the company announced another major move—Lume plans to lease a 56,000-square-foot cultivation facility once operated by Lume competitor Skymint in Dimondale, Mich., with a goal to turn its first harvest by August, according to an article published in Crain’s Detroit Business.

“This additional indoor grow will increase our indoor grow capacity from 250,000 to over 300,000 square feet,” Morrow told CBT. “We also recently decided to increase our outdoor grow from 3 million square feet to 5 million square feet.”

Once established, the goal is to devote the facility entirely to live rosin production to supply its Lume Gold Label brand.

“Our plan for the new facility is to run it as a vertically integrated, 100 percent fresh-frozen grow to solventless extraction to finished goods facility,” Morrow says. “The veracious demand for our premium Lume Gold Label live rosin is so high we need a dedicated factory to keep up with demand.”

Here, in this exclusive conversation with CBT, Morrow details lessons learned from Warrior, plans for the Michigan expansions, why this might be the year Lume becomes an MSO, and how he’s protecting Lume’s viability in a market as unpredictable as cannabis.  

On his innovation background:

Dave Morrow: My dad owned a manufacturing company. I started working in a manufacturing company when I was 13 years old. I was a welder. I was trained as a machinist.

We manufactured continuous casting molds, which were these huge molds that they use when they pour steel.

My dad was an entrepreneur for his whole life.  I grew up in that environment. When my friends were all caddying or cutting lawns, I had a shirt with my name on it and steel-toed work boots. When my friends were all doing internships at J.P. Morgan and Goldman Sachs, I was still working in the shop all through college.

I think it's no different than a kid whose dad works on Wall Street. You just hear it all the time. And then you're more aware. By the time I was 16 years old, I would see a chair and know how they made that.

The lacrosse stick [I developed at Warrior] was an extruded aluminum piece with a plastic injection molded piece, and then I'm like, you know, that's easy to make in Detroit. You’ve got injection molders everywhere. You’ve got aluminum extruders everywhere. I think growing up in Detroit, growing up in a manufacturing family, being forced to work in a machine shop, the majority of my youth just shaped the way I think.

I've been to footwear factories in Asia where they're making hundreds of millions of pairs of shoes for New Balance, Nike, Adidas, you know, they're making hundreds of millions of apparel units. And then I've been into soda pop manufacturers and beer manufacturers and chip manufacturers … and I grew up in Detroit, right? Manufacturing is what we do. And so, I saw [the cannabis industry] and I go, “None of this infrastructure is institutionally scalable and it's not institutionally investable.”

And so that's why the cannabis [industry] presented a challenge for me. I saw how there weren't any scalable solutions. It frustrated and excited me at the same time because I go, “Yeah, this sucks,” but it's kind of cool because we get to develop all this new stuff.

On what set up Lume Cannabis Co. for success, and what differentiates it from other companies:

DM: I've been making consumer products my whole life. I started when I was a junior in college, and I sourced all the Warrior products and eventually grew it into a large global business.

We had an 85,000-SKU global product catalog. We had operations in 12 countries. We sold product in 65 countries. We sourced product in 20 countries.

But for me, my big breakthrough was when I sold Warrior to New Balance [in 2004], and what they did was train me on basically how to run and organize a larger business. And so when I got into cannabis, there's a lot of things that just jumped out at me based on my prior experience.

In the early days, 2018 to 2019, it attracted a lot of people that were basically institutionally un-investable.

But since they had the courage to get in fast, people just thought, “Hey, you know, this guy is one of the first ones, so there must be something there.” And then I started to look at the backgrounds of the people. They were … people that really didn't have experience in scaled CPG manufacturing.

What the industry evolved to was this arms race of license accumulation. And that's when I knew we were on to something, because the best brands you love have nothing to do with license accumulation.

But when this term MSO [multistate operator] came out and everyone was like, oh, they're an MSO, I'm an MSO. I'm like, that's ridiculous. That doesn't mean anything. That doesn't tell me anything about your business. Let’s say we're going to get into fast casual Mexican food or Italian food or Mediterranean food, no one would ask us if we were an MSO, right?

That's not how Starbucks was built or Chipotle was built. Any brand that you admire in the world, you can't really point to it and say, "Wow, I really started purchasing this brand because they got the biggest, the fastest." You purchase that brand because you have an emotional connection to the product, to the marketing, to the service. They earn that. They earn you as a customer, and then they earn you back. And that takes time.

There was this investment thesis that not only would I become more valuable if I had more licenses, but I would be more valuable if I became the biggest, the fastest. And that never happens.

They don't remember when Lululemon was a tiny little yoga brand in British Columbia.  They don't remember when Starbucks was just a local coffee brand in Seattle and how long it took them to break out and become who they are today.      

And so when I saw the mania trade in cannabis, I was like, this is awesome because there's a bunch of irrational behavior, and when there's a bunch of irrational behavior, it provides an excellent opportunity to execute a long-term plan.

Lume Gold Label products. Courtesy of Lume Cannabis Co. 

When I saw this going on, I'm like, there's a glaring conversation that's missing. Because when you're in the consumer product business, it's actually very simple. People in cannabis always talk about what the price per pound is. Unless you're a wholesaler, straight wholesale, I'm like, please take me into a store and show me the one-pound department. Where do you sell pounds of cannabis? This is an asinine conversation. What our industry does is we sell processed units of cannabis.

We sell SKUs, right? In the business of consumer products, whether you're selling cannabis, yoga pants, running shoes, it's how many units do you sell and what's your average selling price per unit? Your ASP. And that conversation is the crux of every CPG company.

The right conversation is, “Are you a scaled cannabis operator?” All I care about is that you're a scaled cannabis operator and you can currently make, (I’m making this up), up to 10 million units of cannabis at a $20 ASP.

When I first got into this business, and I started looking at the various grows, it became very apparent to me that the foundation of cannabis, which was most of the M&A activity that was done in 2018, 2019 and 2020, was this was the best we could do with the money we had.

On the biggest challenges facing cannabis entrepreneurs:

DM: The thing I would hear over and over again is, well, if I match the money with the demand, they'll just figure it out. And I've been manufacturing my whole life in multiple countries in multiple categories. And I will tell you cannabis manufacturing is one of the single most difficult things I've ever been exposed to.

If you and I came up with an idea for sunglasses or women's sportswear or socks or handbags, you name it, there's already people that know how to make tens of millions, hundreds of millions of units. The reason why so many brands, if they can create an innovative product, have the ability to scale so quickly is because the [manufacturing] infrastructure exists. Like at Warrior, when I was out making lacrosse equipment and hockey equipment, I didn't have to build my own factories. I could go to Southeast Asia and be like, this is where Wilson and Rawlings are making their stuff.

You started at smaller factories that can handle smaller minimum order quantities. But then, as you got bigger, the infrastructure is already there.

What made cannabis exponentially more difficult is you had to build out your own manufacturing. I saw all these people running around with a lot of passion, but they didn't have the experience to scale, and more importantly, they didn't have the experience in manufacturing.

For instance, take high-volume gummy production. It’s one thing if you're going to do [production] in a craft fashion. We need to make tens of millions of units now. And then you would think, oh, you just go overseas to where they make all the best confectionery equipment in Switzerland or Austria. They could make billions of units, but not in a dosed fashion. If you say, “Oh, well then go to pharmaceuticals,” it's like, well, they don't make candied Percocet, they don't make candied pharmaceuticals. So that’s a brand new category that new machinery has to be created.

[Lume is] making and selling 11 million SKUs, making and selling tens of millions of subunits, and that was to get to $175 million, which is a large business. But what I'm proud of is we did that all organically. We didn't have one acquisition.

We raised all the money privately; Lume has no institutional funds, we have no hedge funds. All the money came from friends and family. We raised about a quarter of a billion dollars privately. Most people don't have the opportunity to do that. They have to go to these different funding sources.

And then when I also saw that banking was a limiting factor, I knew access to capital would become even more valuable. Because when I saw the usurious rates that were being charged on sale-leasebacks and senior secured loans and kind of loan to own and all this predatory lending that was going on, it got me really excited.

I took a lot of heat at the beginning because people were like, “Why isn't Lume in multiple states?” and I said, “Because I don't believe that's long-term value creation.” What I believe is I have to prove to myself, and I have to prove to my team, and then I ultimately have to prove to my investors that we can produce cannabis at scale.

Jenny Kush. Courtesy of Lume Cannabis Co. 

What happens when the unit price goes down? And that's when everyone's like, “Oh, we're in a limited [license] market, that's not going to happen.” The only way you can grow, if the unit price goes down, is you have to produce more units.

I believe taking a long view is focusing on being a scaled cannabis operator, not a multistate cannabis operator.

On combatting the significant price compression operators face in Michigan:

DM: What happened to us in Michigan is we were kind of forced into that situation because people always ask me, “What caught you off guard?” We knew price was going to go down.

When we were modeling other states, we saw the downward path in seven to eight years, but it compressed that in 24 months. And that was the “holy shit” moment.

I don't care what you're selling—running shoes, coffee—if your average selling price declines 75% in 24 months, 99.99% of people are out of business. It is very, very difficult to absorb that.

Editor’s note: Michigan’s average retail price for adult-use flower dipped 75% from $324 per ounce in January 2021 to an all-time low of $80 per ounce in January 2023, according to the state’s Cannabis Regulatory Agency.

And so in in the middle of 2020, 2021, when we saw this happening, I was like, "How in the hell are we going to combat this?" We’re opening stores, we've got a great brand, we've got products people like. Then it dawned on me, because what I was seeing was as we were lowering price, our unit volume started to go up. And then our unit volume allowed us to scale our manufacturing to reduce our costs.

And so even though the price was going down, our unit volumes were going up, which allowed me to keep our gross margins up and ultimately expand them. So then instead of being afraid of the price drop, we embraced it. We're like, OK, if the prices are going to drop, for us to continue to grow, we’ve got to make more.

And so we really focused on our manufacturing, and, what we ended up doing at Lume, I organized it like I did at Warrior where we had strategic business units. Instead of hockey sticks and equipment and helmets, it was packaged flower, prerolls, vapes, edibles and extracts. And then each business unit has its own unit goals, has its own average selling price goals, has its own innovation goals, has its own gross margin goals.

Because a lot of innovation is really cool, but if it can only be done in a handcraft fashion, it's not scalable. So we can't survive on it. And the cannabis consumer has very high expectations, so you can't [produce] a lot of crap. In addition to having to make a lot, it's got to be high quality and it's got to be priced fair.

Lume’s overarching ethos is premium value. We come in and say, how do we give the customer the best product we can possibly make at scale and provide it at a value where they say, “Wow.”

So, how do we use volume as something that we benefit from and our customer benefits from? Because we can make it at volume, we can still enjoy the margins, we can sell it to a wider audience of people because we can get the price down. I think that's how we earn our customer.

This new facility [the former Skymint grow that they signed a letter of intent to lease in Dimondale] will allow us to drive our monthly live rosin production to well over 100,000 grams a month. We will approach 200,000 grams a month of live rosin once it’s fully optimized. This significant increase in live rosin unit volume production will allow us to continue to drive down costs and ultimately allow us to share those savings with our customers by continuing to sell premium live rosin at value pricing as well as always having it in stock.

People [say] it's frightening because Michigan's unlimited. The reality is the industry's going to be unlimited. Tobacco is unlimited. Alcohol is unlimited. Confections are unlimited. Footwear is unlimited. Supply ultimately doesn't decide who wins and loses. It's the best product.

On plans for Lume’s future:  

DM: We're going to keep scaling because when that opportunity happens, Michigan becomes a Midwestern hub. The only other market we're really interested in deploying serious capital would be in Florida. And that's for the same exact reason, because our criteria is pretty simple: You enforce the regulations and you allow unlimited production (and that makes most people shit their pants.)

That means the price is going to go down, and then when people say cannabis is a bad business, it's like, it's not a bad business. It's an excellent business. It's just a very competitive business. And so if you're not prepared to compete, it's going to make it very, very challenging.

And so I believe that Michigan will ultimately become a Midwestern distribution hub. Florida could be a Southeastern distribution hub. I don't see any other place in the United States that gives us the ability to run the game plan that we're talking about.

Because for us to find out the real price of cannabis, the supply has to exceed demand. But that doesn't necessarily mean it's going to automatically reduce your ASP, because your ASP are processed cannabis units. So if you can produce live rosin in a format in a product that deserves a $20 ASP, it doesn't really matter where it goes.

You can make coffee in your home. You can go get it at the gas station. People drive and wait in line at this company called Starbucks and pay five times as much for overly sweetened coffee. And they pay a massive premium, right? They've earned that because of the innovation in their menu; they created brand loyalty. Coffee is a commodity, right? People don't watch CNBC and be like, "Oh, the price of coffee is going down. Starbucks is going out of business." Think about how silly it is, because that conversation happens in cannabis all the time.

Do we pay close attention to what our cost per gram is? Of course. Do we pay close attention to what our cost per pound is? Of course. Do we use selling price as something we think about? Of course, but it doesn't necessarily influence our ASP [average selling price,] because my job is to innovate the product to delight the consumer with something that they feel is priced fairly. You're not going to look at an infused preroll and say that infused preroll has .4 grams and the current selling price of weed is $1,600 a pound and ask, “Am I really getting a fair deal here?"

Most go, "I really like the product, and I like the service of the company, and I like being in their loyalty program, and they treat me great, and they're always coming up with new stuff, and because they know me and they're always giving me relevant offers." And all that goes into the consumer experience.

On how he applies his innovation background and experience at Warrior Sports to the cannabis industry:

DM: It starts with brilliant product. And what I learned very quickly is if you're going to make processed units of cannabis, you need awesome cannabis as input product.

We had a grow under construction, but I said, "Is there a way to optimize the grow where it could actually become institutionally investable? Could we design a system where, once we get it working, then we can either expand it or export it and say we can take the same exact system and then put it in Ohio or put it in Florida or put it in, you know, Germany?" 

We ended up removing all mechanicals from the grow room. All we have in the grow room is lights. We [manage the environment] outside of the grow room. We designed these custom air units that do everything, all-in-one unit, and everyone's like, you can't do that.

So [Kevin Kuethe, chief cultivation officer, says] “I want to manage the VPD to a certain specific condition based on these different life cycles in the plant, and that's going to optimize the results I'm looking for.” He just programs that into a software system that controls the mechanicals for the room which also controls the fertigation.

RELATED: Fast Take With Kevin Kuethe, Chief Cultivation Officer, Lume Cannabis Co.

People are like where did you get those fertigation lines? We designed them. Where did you get that little head that feeds the plants? Kevin has a 3D printer. He designed it, and that’s all we use.

All innovation is problem solving. And so if you think about what I talked about, producing at scale, since it's never been done, high-quality flower at scale is very hard to do.

You're constantly facing problems, which constantly forces you into problem-solving mode, which constantly adds innovation. Now we grew all this amazing cannabis. Now how do we dry it? Well then how do we cure it?  It sends you down this cascading platform.

We're always looking for other people that can come help us enhance what we're already doing. Take live rosin for instance. I said, “Pretend we've got to make 50,000 grams a month.” Well, if we made that many, then we'd have to use a bigger vessel.

“What happens if there was a big kettle and it was temperature controlled and the agitating medium wasn't ice, it was something else. You think we could do more?” And they're like, “Yeah, but no one's ever done that.”

And I go, “I've made a whole career out of ‘no one's ever done that.’”

So I said let's try it. And so then we test, learn, fail, improve, test, learn, fail, improve.

The reason you're seeing a lot of non-scaled manufacturing solutions, is [because of limited-license states.] What we believe is that as we're finding these scaled solutions, because the innovation goes into the recipe. We can't market infused prerolls and sell 10,000 a month. I’ve got to sell millions.

The day's going to come once things are legalized, that the right CPG strategic partners come. We've grown the business organically from $0 to [nearly $200 million] in five years. We're on pace to do another 20% to 25% growth this year. Business is cash positive.

The business is going to be profitable. This is a tortoise and the hare [story]. I’ve yet to see a thriving consumer product brand that won because they got there the fastest.

We've been very conservative with CapEx. For now, we're buying more third-party product because we have more stores, we have a finite amount of capacity, and we don’t have enough product. Lume’s percentage of what we sold used to be 80% [Lume brands] and it's down to the 60s due to the lack of indoor grow capacity.

Adding the additional indoor and outdoor cultivation should increase our annual production from 100,000 pounds to over 150,000 pounds in 2024. It will also allow us to build back up our market share of Lume branded products in our stores to over 70% this year. We do zero wholesale, and 100% of our Lume-branded products are sold in our 38 stores.

We have a big opportunity to take more margin back by investing more into the Lume CapEx.

On opportunities in Florida and the status of Lume’s license application:

DM: We have a base plan in place. The nice thing about having a Florida license, it also gives you the ability to go shopping. You’re not necessarily going to build it all from the ground up. There's a lot of different opportunities there.

However, it depends on what the adult-use rules are there.

What I've learned a long time ago is don't worry about the things you can't control. Focus on the ones you can. But I think we put a great application together. I would be flabbergasted if we didn't win a license given our current operating acumen. But I understand politics also, and that doesn't mean if we didn't that would eliminate our ability to do business there. We’ll just take a different approach.

But I believe what we're doing in Michigan we can replicate very quickly there, and I think the big opportunity goes back to scaled unit volume production at premium value pricing. Scaled volume allows you to get the prices down faster, it gets the consumers great product at a great price. Our obsession is providing our customers with the best product at the best value. That's what we talk about every single day.

People say we're trying to run everyone out of business. I'm not beholden to my competitors. I'm beholden to my consumers. My consumers are my family. That's who I love. That's who I want to take care of.