If we needed to choose essentially the most complicated funding themes we cowl, artificial biology and gene modifying could be on the prime. So would hashish. Legalizing marijuana for grownup use in varied states whereas maintaining issues unlawful on the federal degree has created a really complicated surroundings to navigate. As with all thesis, our objective is to search out the market chief and place our bets. To take action, we remoted the highest six multi-state operators (MSOs) after which began evaluating every.
Our easy screening methodology seems to be at metrics similar to intangible property on steadiness sheets (a decrease quantity is best), ratio of money to liabilities (extra cash is best), and naturally the absence of any purple flags. To this point, Trulieve seems to be essentially the most fascinating MSO primarily based on these standards.
All through this train, we’ve realized simply how complicated the hashish business is which has raised a number of query. For instance, one subscriber requested how we’d go about valuing licenses that MSOs can’t cease shopping for up. That’s almost inconceivable to do as a result of there are such a lot of components concerned. Even when you might worth licenses, that doesn’t imply a lot. Proudly owning a license doesn’t imply you’ll then be capable to function a worthwhile dispensary. There are additionally limits on the variety of dispensary licenses you possibly can personal in some states. That was information to us.
Sorts of Licenses
Traditionally, we’ve thought-about licenses to be of three sorts:
- Dispensaries
- Distributors
- Growers and processors
Seems that the sorts of licenses on supply – together with vertical licenses – differ by state. For instance, Massachusetts affords 9 sorts of hashish enterprise licenses: marijuana cultivator, craft marijuana cooperative, marijuana product producer, marijuana retailer, marijuana analysis facility, unbiased testing laboratory, marijuana transport, marijuana microbusinesses, and marijuana supply. Every license comes with necessities for making use of, upkeep prices, and limits.
Maybe essentially the most seen licenses are for dispensaries. We have now – maybe naively – been specializing in what number of stores an MSO has open as a proxy for market management. That’s additionally as a result of the MSOs make this a focus of their investor decks. However for some states, there’s a restrict on what number of licenses an MSO can maintain. Right here’s a chart from the newest CRESCO Labs investor deck the place they present their progress towards a handful of states with limits:
In taking a look at what number of dispensaries Curaleaf has in every of the States with caps (IL, MA, MD, NY, OH, and PA), they’ve the utmost allowed open dispensaries in each state besides Pennsylvania the place they solely have 12 of 15. This spray-and-pray strategy places the utmost quantity of pores and skin within the recreation. After that, it comes all the way down to who can construct one of the best model by satisfying buyer demand whereas competing towards the black market.
Nonetheless, that’s solely on the retail facet. One other good slide by CRESCO reveals how the margins in retail are slim whereas rising the product itself offers good fats margins.
Wholesale develop operations are the technique some MSOs are taking the place they attempt to tout what number of sq. ft of rising capabilities they’ve in every state. One may suggest that for an MSO to extract essentially the most worth from any state, they want vertical integration. That’s, they should function the whole provide chain – rising, distributing, and promoting.
The Significance of Vertical Integration
The one approach an MSO can sufficiently displace the black market is that if they’ll compete on price which may solely occur by way of vertical integration. We already know this to be true. The nearer you get to the grower, the higher offers you get. Sadly, every state has totally different guidelines about whether or not or not you should be vertically built-in (Colorado) or you possibly can’t be vertically built-in (Oregon). States that oppose vertical integration say that companies will develop too sturdy, prospects gained’t have a lot selection to select from (as if), and it suppresses competitors. States in favor of vertical integration argue that it’s simpler to manage and brings the price of hashish down. As MBAs, we solely care about perceived benefits for MSOs, and vertical integration appears to return out forward in that respect.
Bailey Campbell (Wharton Faculty, Class of ’23) put collectively this fascinating chart which reveals which states permit vertical integration and which don’t.
The one option to scale back operational complexity is for MSOs to start out narrowing their deal with choose states the place the largest alternative exists. A easy proxy for potential market dimension might be inhabitants, and that’s what this desk by CRESCO Labs reveals us.
However as anybody who dabbles is aware of full effectively, there are some states the place it’s extra socially acceptable to puff the satan’s lettuce. Analysis agency New Frontier Information offered info on estimated gross sales in key states for 2020 which ended up on a Curaleaf investor deck that we “leveraged” to provide this desk which reveals hashish gross sales – medical, grownup, and illicit – in USD billions.
| California | 13.4 |
| Florida | 5.2 |
| New York | 5 |
| Pennsylvania | 3.5 |
| Illinois | 3.5 |
| Michigan | 3 |
| Massachusetts 2.7 | 2.7 |
| Ohio | 2.6 |
| Arizona | 2.5 |
| Colorado | 2.5 |
| New Jersey | 2.2 |
We’d prefer to see MSOs begin to focus their communication on a handful of flagship states the place they wish to set up management. That’s what Trulieve has carried out with their “regional hubs” strategy which focuses on three key states – Florida (#2), Pennsylvania (#4), and Arizona (#9).
Trulieve Narrows Focus
Final month Trulieve revealed a contemporary investor deck which defines three regional hubs – Southeast, Northeast, and Southwest – which presently include 11 states during which they function, three of that are cornerstones.
- Florida – 111 medical dispensaries out of 396 authorised dispensaries – so 28% market share in that respect. 22 vertical licenses in Florida of which an unknown quantity belong to Trulieve. We’re assuming they’ve not less than one which ought to be all they want?
- Pennsylvania – Pennsylvania market has 50 retail permits (3 places per allow), 25 grower/processor licenses, and as much as 10 analysis/scientific permits. Trulieve has “18 affiliated retail places” and “wholesale distribution to 100% of the PA market.” So this info doesn’t mesh with what we talked about earlier – PA doesn’t permit vertical integration and caps dispensaries at 15. Is the entire “affiliate” factor how Trulieve will get round this?
- Arizona – Trulieve operates 17 retail dispensaries supported by 320,000 sq. ft of cultivation. Arizona has 130 core vertical licenses, 13 rural/underserved county licenses, and 26 future “social fairness licenses,” no matter meaning. Once more, we’d assume that Trulieve owns not less than a type of vertical licenses as a result of we’re not instructed in any other case.
We actually like how Trulieve is speaking details about licenses within the context of complete licensees obtainable and state-specific restrictions, however it’s not sufficient info. Traders shouldn’t should dig by way of this regulatory complexity to attempt to deduce their management place. It’s good progress in the direction of offering us with the knowledge wanted to make knowledgeable funding selections, however not fairly there but.
An MBA Case Examine
Our thesis is that now is likely to be time to spend money on hashish shares, and we’ve made one wager up to now. Earlier than making any extra bets, we wish to take a holistic have a look at the business and attempt to deduce what enterprise mannequin may come out forward in the long run. We’d argue that vertical integration could be the approach ahead as that’s the one approach an MSO can function a worthwhile enterprise whereas having the ability to compete within the black market.
One other conclusion we’re arriving at is that the spray-and-pray strategy of making an attempt to canvas each state the place hashish is authorized could current too many complexities for buyers to maintain monitor of, to not point out the MSO that’s making an attempt to execute on such a method. Maybe a greater strategy is likely to be to choose a handful of states that seem most promising for vertical integration after which goal them whereas offering extra particular communication to buyers alongside the best way. That’s the course that Trulieve is taking now and we’re liking it.
Determining what number of MSOs to spend money on has been a problem. Investing in only one inventory brings an excessive amount of company-specific danger whereas two shares will double the quantity of capital we’re allocating to a really dangerous and ever-changing house. As a subsequent step, we’ll cowl Colombia Care – the one MSO we haven’t checked out not too long ago – and see the place we’re after that.
Conclusion
Put money into what . What’s easier than rising weed and promoting it? On the black market, it’s at all times been very simple. Don’t have interaction with shady folks, don’t entrance, don’t burn anybody (you’ll get ratted out), and most significantly, don’t entice consideration to your self. Individuals have been working this manner for many years at extraordinarily excessive ranges of effectivity – how could sellers fear about advert spend?
As we speak, legalized hashish comes with an infinite quantity of regulatory complexity. There’s medical hashish, then there’s grownup hashish coming in excessive of that, then there are state-level idiosyncrasies which are troublesome to navigate as a result of they’re so new. The very best strategy to take is likely to be to choose states the place you possibly can vertically combine (the one option to compete with the black market), then deal with turning into a market chief whereas speaking progress to buyers concisely and easily. Perhaps it’s time to cease buying and begin specializing in vertical integration.
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