Mega-Retailer Peter Horvath Brings His A Game to Cannabis: Will It Be Enough?

Peter Horvath hesitated slightly during a mid-November interview in Las Vegas. He was about to give away a secret of the retail trade. “I’m basically telling my competitors what to do,” he said before catching himself. “I’m not worried about it, because it’s not that easy.” That was a big understatement. Like ancient codes and search engine algorithms, retail done correctly is part science, part alchemy, understood by few, and properly practiced by fewer. A practitioner of the highest order, Horvath’s singular career has included stops at Victoria’s Secret, American Eagle Outfitters, DSW, The Limited, and now publicly traded Green Growth Brands Ltd., based in Columbus, Ohio.

“We respect and admire everybody that has gotten the industry to where it is. That’s the first thing,” he said in response to a question about his impression of the industry’s grasp of retail. “They came from diverse backgrounds, and they’re all focused on products, and that’s great, because we’re about to go through an explosion of product development that is only going to accelerate more. Product is important: quality of product, anticipating what consumers want—super important. But particularly in retail, where you are on the front lines with consumers, experience competing for—and earning loyalty from—consumers is going to be a huge advantage.”

Street-tested

Brimming with youthful energy, Horvath ticks off accomplishments with matter-of-fact ease, avoiding boastfulness through the sheer weight of the achievements. “I am the only CEO in the entire industry who has taken a company public on the New York Stock Exchange, and then been there doing earnings conference calls for three-plus years. And, thankfully, what I pitched when we went public is what we talked about even on the last conference call,” he said. “They always say the key to a successful strategy is making sure the strategy connects with what you’re capable of doing. So, that’s the way I’ve approached everything in every business I’ve been involved in, from the defense industry to retail and brands, and now cannabis.”

Horvath’s stint with a defense contractor took place a few years before he settled into cannabis, which is a decidedly different sort of product and industry from the others along his career path. Could he be biting off more than he can smoke even with thirty-plus years of high-end corporate experience?

“I don’t think so,” he said. “We have a confidence that we have earned. We are the first retail team [in cannabis] where the CEO is a retailer and understands the cross-functional necessity of working top-to-bottom to earn consumer loyalty. We’re not just people who’ve worked in retail. We’ve won in retail. Our team has been at the table developing, leading, and executing the strategies that built the number-one lingerie business in the world, the number-one personal care business in the world, the number-one denim business in North America, and the number-one special issue business in North America. It’s like, if we only had one win, I’d be proud to say it, but we’ve got four wins. It gives us a depth of understanding with consumers.”

Retail runes

Divining the secrets of retail requires a deep dive into human desire. It’s a subject Horvath is more than comfortable discussing. “There are three levels of branding,” he explained. “There’s emotional, functional, and technical. Emotional is how it makes you feel, functional is what are the benefits, and technical is how do you make it. The world of cannabis has been focused on technical.” He mentioned a recent meeting with vape producer dosist. “That’s functional. First, there are no pure-play retailers anymore; you must be digital. Retail is not a brick-and-mortar store but every touchpoint with the consumer. The functional and technical is going to happen on your phone, before or after [a sale] or both. The emotional is in-store.”

Retail may be every touchpoint with the consumer, but for the moment most people still “touch” the retailer when they go into a dispensary to make a purchase. It is there that the seeds of loyalty are sown. “A store must create an emotional position and experience that stands for something that makes customers loyal to that experience,” said Horvath.

He visited 100 cannabis dispensaries last year and has been quoted extensively in the press as noting all the shops were leaving double-digit market share on the table. “They are still underperforming,” he added. “How do I know? It’s a trick. Every retailer is underperforming. Cannabis retailers are underperforming more than other categories, however, and it’s because they don’t have the experience dealing with consumers.

“Here’s how I know they’re underperforming,” he continued. “The generalized experience is that there are many points of dissonance [in dispensaries] that are easily avoidable. If we forget about the check-in process and the casting of associates, if you simply look at product assortment… the presentations look like a dog’s breakfast, like ransom notes. Nothing looks like it should be next to each other. You don’t know why one brand is different from another, why prices are different. It’s confusing and complicated.” Solving consumer confusion is crucial for retailers selling broad assortments of low-margin products. “That’s what the business is,” he said.

Store smarts

Experienced retailers inherently understand the dynamics of flow. “If you walk into a MAC cosmetics store, the products and store fixtures are in complete harmony in terms of height and shape,” said Horvath. “When you walk into an Apple store, the entire store is shaped like an iPad. All the shapes are square; everything is harmonious. That is because there is a calming effect when you walk into something that’s narrow and clear in terms of purpose.”

What is that purpose? “It’s this thing the best retailers try to accomplish: How do I get someone to walk in and in four seconds decompress and then understand what I’m trying to give them? That can mean the experience and it can also mean the product. [There is a problem] if you can’t walk into a store and tell which the most important product is.

“With a cannabis store, even though vapes, edibles, and concentrates are on the increase, the star is flower,” he said. “Even if flower goes from 50 percent of sales to 20 percent, it still must be the star because it’s the mother of this whole idea. When you walk into the store, it should be obvious. If the flower is in the back of the store, there should be a shrine to it. If it functionally delivers 50 percent of sales, great, but the customer needs to know its star power immediately.”

Horvath also cautioned against the “Starbucks effect,” a common malady among cannabis retailers. “Nascent retailers are quick to say they want to be the Apple, the Amazon, the Starbucks of cannabis,” he said. “If it was that easy, we wouldn’t be talking about them. It’s not. They want people to think they are going to be the dominant player, and there is no easier way than to tell them to use something familiar, and most people drink that Kool-Aid.”

Cannabis stores, said Horvath, should be designed for women. To make his case, he referenced Paco Underhill, the revered retailer and author of Why We Buy: The Science of Shopping. “Paco will tell you that how you lay out tables and product on flow are very important,” said Horvath. “He’s observed that women are the most important shoppers of any product, because it is in their DNA to analyze, assess, and see everything, and it is in [men’s] DNA to go kill something. We’re goal oriented, and they want to make sure they don’t miss something. They are going to see something we don’t see.”

It took decades for car dealerships to figure that out, he added. “And if you can kill it with a millennial woman, centennials [will follow their] big sisters… If you get that group, all the older women are likely to follow, because they all want to see themselves as a 26-year-old. And if you get all the women, you’re going to get all the men. If you don’t believe me, watch [reality show] Bar Rescue. He always cleans the bar up first, saying you have to get rid of all the drunks. You’ve got to make it a place where women feel safe, and then you’ll get more guys.”

Green growth

Horvath has staked his claim in remarkably short order. It was only January 2, 2019, that Xanthic Biopharma officially changed its name to Green Growth Brands (GGB). Xanthic, doing business as GGB, had made its trading debut on the Canadian Securities Exchange a few months earlier, on November 13, completing a reverse takeover announced in July.

“The formal name change represents the next step toward GGB’s goal of becoming the premier cannabis and CBD-infused personal-care product retailer in North America,” said the company in a press release. The announcement was made amid a flurry of other aggressive moves by the company, including the acquisition of a second cultivation facility in Nevada and the receipt of seven additional retail licenses in the state; the acquisition of Just Healthy, a company that holds provisional certificates of registration for a dispensary (expandable up to three) and cultivation/processing site in Northampton, Massachusetts; and a highly publicized unsolicited takeover bid tendered in late December for Aphria, a Canadian cannabis company traded on the New York Stock Exchange.

GGB currently operates one dispensary in Las Vegas, The+Source, which Horvath said is primed for significant growth. “My team at The+Source and our team in Columbus are working to increase sales by 33 percent in the next two to three months by making adjustments to the assortment navigation, the strategy of the store—pricing and whatever—the customer flow of the store, and the back-office supply chain, if you will.

“The store does about 8,000 transactions a week and typically runs about 1,200 to 1,300 transactions on a Friday,” he said. “What they are doing is exceptional. It’s easy to navigate; free-flowing. You don’t need to talk to anybody unless you want to. Once the guys are out taking orders on the floor and you get in line to pay, it doesn’t annoy you because it moves fast because your order is getting picked while you are in line.”

He intends to build on what The+Source management already is doing. “They have consumer loyalty because the consumers are loyal to the staff,” he said. “They love the staff. We just met, and my wife sat outside The+Source, watching customers come in, who they were, the broad range, watching them interact with the team, and saw the relationship that was there. It brought her to tears when she told the leadership team of that store that what she saw was the reflection of the company’s founder, Andrew Jolley. ‘How he treats you is a reflection of how you treat the customers,’ she told them. And she’s right.

“So, how do you take that and scale it,” Horvath asked rhetorically. “We’ve done it at Victoria’s Secret.”

In addition to scaling via brick-and-mortar stores and every other type of retail channel, plans include establishing hundreds of mall kiosks, where GGB plans to become a leader in the CBD movement.

“We have a pipeline of deals that we will announce as a public company when they are complete,” said Horvath. “Our estimate is that if you take trailing 2018 revenue with the businesses we’re going to buy, we will probably be a $100 million 2018 company. Now, they won’t be in our financials, because that doesn’t make the crossover until you own it, but if you ask what the business is likely to do in 2019, it will be at least $100 million, and then we will have new licenses and new deals. So, we’re not going to be able to catch up to Acreage, GTI, and MedMen in terms of the number of licenses, but I think we will catch and surpass them in terms of sales and profit.” Currently, GGB’s market cap stands at about $600 million, according to market analyst Seeking Alpha.

Hostile takeover?

From the get-go, analysts questioned GGB’s offer to acquire Aphria for $8.07 per share. “This offer is surprising because GGB is smaller than Aphria, operates in the U.S. and not Canada, and because GGB’s takeover offer came at a discount rather than a premium,” Seeking Alpha’s Jonathan Cooper wrote on January 7. “Despite that, I view this offer as more than just a publicity stunt: It may be a harbinger of things to come. Over the next several years, we are likely to see consolidation between the currently-separate worlds of U.S. and Canadian cannabis. This may be an early glimpse at offers that will become more commonplace in the coming years.”

Other observers noted conveniently close relationships between the two companies. “During a recent interview with Bloomberg, Green Growth CEO Peter Horvath insisted nobody at Aphria prodded him to make an offer for Aphria in an effort to spark investor interest for the target,” Cory Renauer wrote for The Motley Fool. “The denial didn’t have much of an effect, partly because an Aphria-controlled investment fund called GA Opportunities is Green Growth’s second-largest shareholder.

“Green Growth is still re-forming its board members because it just closed on a merger with Xanthic Biopharma in November,” he added. “Perhaps it’s just a coincidence that two of Xanthic’s board members with close ties to Aphria put feed money into Green Growth in March.”

Those observations came mere days after GGB reiterated its intention to acquire Aphria. In a release issued December 31, Horvath doubled-down on his argument the deal represents a big win for Aphria shareholders, denied any untoward relations between the two companies, defended GGB’s recent record of success, and put a positive spin on all the media attention.

“Since we announced our intention to launch the takeover of Aphria, we have seen two things,” he said. “First, Aphria shareholders are welcoming a 45-percent-plus premium offer because they understand the significant value that can be unleashed by our combined teams, assets, and geographies. Second, a real interest in the market to understand Green Growth and our valuation.

“When investors consider our trailing revenue, recent license wins in Nevada, and a buildout in the new market of Massachusetts, they agree that it is not a question of if Green Growth reaches C$7 per share, but when,” he added. “We understand there are some in the market who want to focus on destroying value at Aphria, but we are committed to creating it.”

The thought process behind the Aphria offer perhaps was best explained by Horvath in a Bloomberg interview conducted a few days before the December 31 statement. “I think it’s important to understand that how you win in Canada is different from how you would win in the United States,” he said. “In the United States, we believe it’s consumer-focused, it’s brands, it’s consumer experience, and it’s quality product. In Canada, the current situation is that the government is who you sell to, so we think being a licensed producer is the way to go there.

“Ultimately, as the laws change in both countries, combining over the borders will absolutely make sense,” he added. “But, to be clear, the first opportunity is to take [Aphria’s] experience in cultivating and apply it to our operations in Massachusetts and Nevada, and then other states as we grow. Take our experience in branding and product development—particularly in personal care products that have CBD in them—and bring that to [Aphria’s] opportunities to sell in Europe and other countries.”

GGB MANAGEMENT TEAM

Peter Horvath, CEO, has held leadership roles with brands including Victoria’s Secret, American Eagle Outfitters, DSW, and Limited Brands. Under his leadership, shoe retailer DSW went public on the NYSE with a $1.5 billion IPO.

Scott Razek, CMO, has led the creative and marketing teams for retail brands including Victoria’s Secret, Bath & Body Works, American Eagle Outfitters, and Limited Stores.

Ed Kistner, CAO, possesses thirty-three years of retail experience in operations.

Kellie Wurtzmann, CSO, has managed operations across multiple retail sectors for retail brands including Victoria’s Secret and Virgin Entertainment.

(Photos courtesy of Green Growth Brands)