Weedpocalypse Now: California’s New Regs Are Taking a Toll

July 1 brought lots of extra shelf space in California’s legal pot shops.

weedpocalypse mg magazine Sept 2018

Display shelves in California’s cannabis shops experienced a sudden transformation July 1 as the deadline passed for companies throughout the food chain to reach full compliance with a raft of regulations covering everything from lab testing and child-protective packaging to in-store product displays. As necessary as many of the regulations may be, the cost and complexity of complying with them left many brands unable to participate in the legal market at the stroke of midnight July 1. The immediate result was jarring: shelves fully stocked with flower, oil, concentrates, topicals, and edibles at closing on June 30 looked like something out of Soviet-era Moscow the following morning, barren but for a few loaves of stale bread.

The situation varied from store to store. Some shops with licensed cultivation at the location were able to get legal harvests through the testing and packaging process with little downtime. This was rare. Shops dependent upon sourcing their products are the mainstay of the industry and they were in a completely different situation, wholly reliant upon a regulatory and supply-side system that can be described only as a work in progress. As a result, retailers often simply do not know the disposition of brands, many of which are unable or unwilling to state unequivocally whether they are in or out of business. The term “on hiatus” is used of late by companies eager for the industry to anticipate the return of their products. As everyone knows, however, dormant brands do not have a terribly long shelf life in consumers’ hearts. What matters is what’s visible on the shelf.

Advertisement
delta9packaging.com

In that regard, after July 1 budtenders struggled to explain why product that was legal one day was illegal the next. Managers assured customers brands and strains of flower that traditionally had been carried by their shops soon would be back—claims that may or may not have been true. Anecdotal evidence suggests many of the brands available before July 1 will return, but some never will. The resulting transitional uncertainly, while unsettling for almost everyone involved, is about to unleash a second wave of brand launches. The new products, some of which already are available for sale, are themselves pioneers of a sort: the very first generation of legal cannabis products available in California via licensed retail and delivery only.

Orders surge

What data exists suggests statewide orders from cannabis retailers spiked dramatically. According to LeafLink, which streamlines inventory management and ordering processes for 600-plus brands and more than 2,000 retailers nationwide and has been tracking the movement of the newly regulated cannabis market in California since July 1, the company “has had its highest weekly order volume to date in California, signaling the maturation and eagerness of the legal market to adapt to these new regs.”

A few statistics noted by LeafLink in mid-July include:

  • Retailers spent 59 percent more on products from the prior week, with a 196-percent increase from what was spent the week of June 18-24 leading up to the July 1 regulations.
  • Based on orders through late July, LeafLink expected retailers to spend triple the amount they spent in June.
  • Retailers placed bigger orders. Cart size, or the average amount ordered per retailer, increased 22 percent from the week of June 18 to the week of July 9.
  • Companies that updated their product images with a “compliant” badge created by LeafLink saw their sales grow 201 percent in July compared to 46 percent for brands without the badge.
Product availability

Determining precisely how much legal product is available in California is no easy task, especially since the numbers keep changing. In mid-July, Leafly compiled a list of brands that survived what it called the “California #weedapocalypse of 2018” but acknowledged the list was very much a work in progress and likely would expand. The list contained about seventy flower brands, the same general number of extract brands, about forty edibles brands, and eight topicals brands.

“Call ahead to your local retailer to ensure your brand is in stock,” suggested Leafly, and there could be no better advice. That a brand survived the #weedapocalypse was no guarantee it could provide enough product to supply even local shops. Being on Leafly’s list did not even mean a brand had all its ducks in a row packaging-wise. Retailers said it is their responsibility to vet the claims made by vendors and distributors as to the compliance of a brand or product, and experience has taught them such vetting is a necessary part of doing business.

“We can’t hold the distributor responsible if something is not compliant,” said Aaron Justis, president of Buds & Roses dispensary in the trendy Sherman Oaks area of Los Angeles. “We make the check. In a few cases, brands told us they were compliant, and we had to tell them, ‘You’re missing this and this.’ They had to redo those things. I think there is a lot of that going on with some of the new companies, especially.”

Some of the more experienced brands had no such issues, mainly because they saw what was coming and prepared appropriately. “We had to put on additional shifts to manage the new packaging requirements and our growth,” said Adam Grossman, founder of Papa & Barkley, a manufacturer of tinctures, balms, and other products. “Our logistics team has been working nights and weekends to repackage orders and take care of our dispensary partners who were affected by the packaging changes.” As a result, Papa & Barkley products were ubiquitous on the shelves in late July.

Other brands were similarly situated, but many also were backlogged, waiting to get through the lab testing process or simply unable to scale sufficiently to meet the demands of a hungry statewide market. Indeed, so many brands were in a precarious situation of one sort or another that it serves no purpose to identify them by name lest we influence their demise. Licensed retailers also are under duress in an immature market that still includes a healthy dose of black market activity. Forced to become virtual slaves to the state, with the future bearing down on them like a freight train, they know they must have a plan for survival beyond a mere retail shop or two. The margins in that game simply don’t add up otherwise.

“Luckily for me, we decided late last year to focus not only on building out our brand, but also on manufacturing, processing, packaging, white-labeling, and wholesaling,” said Gregory Meguerian, owner of The Reefinery dispensary in south Van Nuys. “Because of that, I’ve been able to [stay ahead].” Meguerian, like Justis, holds a micro-license, which allows him to create as much of a self-sufficient business model as possible by vertically integrating. Like cultivators, who need to find ways to derive value from the entire plant to compete, California’s cannabis retailers are faced with two stark choices: diversify or go big. Not surprisingly, the ways in which retailers put those choices into action are as varied as cannabis strains.

Throughout Los Angeles, the cannabis available to consumers still depends on the individual shop they enter, but in legal shops in July, at least half of the inventory consumers were used to seeing was gone. Much of the product in stock was new to them.

Buds & Roses

Located on a leafy section of Ventura Boulevard in a brick building adjacent to a sidewalk café, Buds & Roses is about as successfully branded a cannabis dispensary as exists in Los Angeles. It’s not just the catchy name but the effective marketing skills of  Justis that have made his shop a bona fide tourist destination. Still, he  is considering a public reopening of the store now that the operation finally is legal.

“It’s like Buds & Roses is opening for the first time,” he said. “It’s great.” Before, all he and the other Los Angeles-based pre-ICO shops had was an affirmative defense to be used in court in case they were raided by law enforcement.

Justis recently acquired the second story of the building the shop occupies and soon will start building out the space to include offices, a grow, and plenty of room for manufacturing. He said he saw what was coming with the July 1 deadline and planned accordingly.

“We just didn’t order a lot of product,” he said. “We let stock run low, and we ran out of some product about a week before [July 1]. We had a couple of sales but managed our inventory, so we didn’t have to have too many. Flower is no longer 70 percent of sales but it’s still the bulk, so we were well-stocked with flower. It was some tinctures and specific products we didn’t have, but we were pretty good on flower and had some edibles.

“We just got in a concentrates brand that’s temporary, which is not a great thing to do to customers,” he continued. “But it’s going to happen in a few categories, and concentrates is one of them. The few companies we were working with don’t have product but hopefully will soon.

“And then we also messaged vendors to make sure they would take care of us in the long run,” he added. “If we destroy some product, will they credit us? Things like that.”

He’s also keeping a list of products his customers want to be informed are back. “We have a long list,” he said. “I think people appreciate it.”

Known for his veganic flower, Justis said Buds & Roses dialed down cultivation with an eye to using the period for research and development and then growing the grow from there.

Aaron Justis, Buds and Roses, mg Magazine September 2018
Aaron Justis, president, Buds & Roses. (Photo: Tom Hymes.)

“Our other grows were not built for a regulatory environment,” he explained. “So, late last year we stopped all cultivation and started building out the space here for the licenses. We’re about to harvest again in about three or four weeks in this building. We want to perfect our cultivation on a small scale and then build it out from there. We’re starting over, starting small, and building out [our stock].”

Buds & Roses also is known for its curation of quality products, and Justis has no intention of letting that distinction wane. “We source a lot of flower, and I think that’s something we’re going to be known for going forward,” he said. “It’s curating all products, but it really starts with the flower. We’re really focused on our long-term relationships with the cultivators.”

He’s also bringing in flower grown in environments other than indoors. “I think [light-deprivation] serves a good purpose, even for our demographic. Sun-grown and lower THC and terpene profiles and all that, but a better price,” he said. “We’re open to it, and right now we’re carrying Flow Kana.”

Flower needs to be assessed on a case-by-case basis. “For me, it’s about the quality of the flower and being able to test it,” he said. He’s worried new methods of distribution will forgo the time-proven methods of buying product.

“We’ve been getting prepackaged for a while, but it used to be you’d look at a pound and like it, and look at another pound and say, ‘I don’t want this one.’ Now they have a list of prepackaged eighths, and the truth is two or three out of six might not be that good. I don’t want to be forced to buy all of them. It reminds me of satellite TV packages, where you pay for channels you don’t watch.”

It’s a tough situation all around. “The growers have taken the time and expense to package all these eighths, and they have to move them,” acknowledged Justis. “They’re not exactly demanding that we take everything yet, but it’s going to be an issue.”

It’s not the only area of potential conflict. A scarcity of product in a competitive marketplace holds the potential for long-term damage. “Vendors [are wary] of supplying some dispensaries and not others,” he said, “because as a customer, if there’s product I need and I see it somewhere else—and [the distributor says], ‘Yeah, we only had enough for them and we’ll have yours in a few weeks’—I’m going to hold that against them. I will probably be looking for something to replace them.” He paused and added, “That has happened. We’re not going to forget. We’ll never forget.”

But that’s just a blip in the big picture, which Justis always keeps in perspective with the motto, “Regulation is better than getting raided.” In that regard, even the subject of lax enforcement of illegal shops doesn’t damp his optimism.

“They need to step up enforcement of rogue shops, but my focus is on the future,” he said. “I think in a month or so, things should be back to normal. And the truth is, it’s getting easier in many ways to get product. Starting late last year, many of the people we were working with [became] more professional. Now, with regulations being finalized, it’s getting even easier.”

Going digital will make things easier still. Buds & Roses now uses Simplfya to, well, simplify things. The store uses Greenbits as its point-of-sale system.

“It’s time now to really be a retailer,” Justis explained of the additions. “I know there is this idea of running a mom-and-pop store, but they don’t really exist anymore. It’s too competitive. If you’re not using advanced retail techniques, like loyalty rewards, it’s a downhill battle. You have to be super-serious about retailing. Our competitors are consolidating, getting bigger, and putting pressure on us. There are quite a few large retailers. I do look at MedMen as sort of the 800-pound gorilla in the room, but there are other large retailers making more money than them.”

So, what is his strategy to compete with the large retailers? “For me, it’s about building a brand and having a retail experience, because things are moving to online ordering and delivery. I’m focused on the long term and curation, which means constantly reeducating ourselves.

“I knew this would be a transitional year and it wasn’t going to be exciting in terms of meeting new sales goals,” he added. “We were going to lose some money, but that’s the industry as much as all the renovations necessary to get into compliance—building the vaults, installing the security systems.”

The Reefinery

Meguerian, owner of dispensary The Reefinery, is using the significant advantages that come with his location in a commercial area of the San Fernando Valley to build an ancillary wholesale business that easily could rival his retail ambitions. A longtime member of the cannabis industry, Meguerian also has the advantage of knowing not only everyone in the Los Angeles cannabis community, but also where all the bodies are buried. A strategist by nature, he planned for July 1 by starting to get rid of non-compliant product via price reductions months before anyone else picked up the practice.

“The state gave you 180 days, up to July 1, to get rid of it,” he said. “Unfortunately, some people overbought in the worry there wouldn’t be enough legal product, leaving all this phase-one product [unsold].”

On the supply side, Meguerian saw a lot of unfocused behavior from vendors. “I don’t know what the heck they were thinking, because as a manufacturer or cultivator you have one primary thing to think about: Is your product legal and complaint?” he said. “You knew the July 1 deadline was coming. How could you not have your packaging together, or the child-proofing?

“Some of these companies were making plenty of money,” he added. “They were focused more on money than compliance. It happens. ‘Let’s keep it going, keep it going. We’ll figure the compliance out later,’ and then in the blink of an eye half the year is gone. What the brands should have done is hope for the best and plan for the worst. Anyone who planned for the worst would not be in a bad situation now. That’s just reality.

“They are going to come back, but do I know why it’s taken all this time? No. It’s upsetting when you don’t have a logical answer for something.”

Meguerian employs a buyer, but he recently had to step in personally when some brands began withholding product like what Buds & Roses experienced. “I had to get involved and let them know I need this product, and if I see it in another store within a certain radius before we get it, I’m going to be pissed and I’m going to reconsider whether I’m going to carry their product again,” said Meguerian. “I understand they’re stressed-out and under a lot of pressure, but that’s not an excuse.”

Established brands that had been on “hiatus” slowly returned to The Reefinery shelves, though Meguerian said he kind of likes having fewer SKUs to deal with. What truly sets his business apart right now is that he is aggressively building his wholesale business at the very time it is needed. He currently has eight strains of flower available in The Reefinery-branded jars of eighths, as well as a pack of prerolls similarly branded, and he is selling the products not only at The Reefinery, but also in more than twenty other retail shops throughout the city.

Greg Meguerian, The Reefinery, mg Magazine, August 2018
Gregory Meguerian, owner, The Reefinery. (Photo: Tom Hymes.)

“Right now, my shelf is all Reefinery flower except for a few brands, but not many,” he said. One of those brands is Erik Hultstrom’s Legacy Strains. A longtime Los Angeles grower, Hultstrom is in the process of obtaining a license. In the meantime, Meguerian is keeping a few of his branded strains on the market, a goodwill gesture that is also good business.

“I want Eric to survive and have a bigger grow so I can distribute him,” said Meguerian, who seeks to meet the needs of the Los Angeles retail community any way he can.

“I don’t mind if one of the other stores approaches us and says, ‘Hey Greg, I have this contact and they’ll sell us this much in bulk. Will you purchase it with your distribution license, white-label, package, and label it for us? And what would you charge us for that?’

“Let’s sit down and make a deal,” he added. “There is always a way to make a deal. That’s why I’m working on my offsite location [in Van Nuys], because I want to do processing and labeling. I want to do a lot of white-labeling and help people build their brands. I think that’s a very important and vital part of my business.”

Meguerian is serious about staking his claim to wholesale distribution in the city of Los Angeles and believes he brings very special advantages to bear. “I pretty much know everyone, and I’m not greedy,” he said. “I could be the nicest guy in the world. Everybody could love Greg. But at the end of the day, if those numbers don’t make sense for the licensees, they’ll go to another distributor.”

He also knows the business inside-out, which means he knows exactly where to place price points to his and his customers’ greatest advantage. “That I know this market so well is a huge advantage,” he agreed. “People come into this market with crazy numbers and ambitions: ‘I’m going to charge you 20 percent of your gross revenue.’ Okay, but who the hell are you?”

In addition to The Reefinery, Meguerian—a Marine veteran who has also served various industry trade associations—plans a vape line that will be branded differently. He wants both brands made available to consumers throughout the state and intends to use local distributors when appropriate. “The goal would be to work with a northern distributer for NorCal sales,” he said. “The local distributor knows the region. They know their people, and the people know and like them. They’re one of their own. They’re worth what you’re going to give them.”

He could make the same pitch for his own services. In addition to retail and wholesale, The Reefinery imminently will start delivery services, first to existing customers and then to the public. Several other projects are also underway or percolating. Each day brings new adventures.

“I compare us to the modern family, where you have to have multiple incomes to survive,” said Meguerian. “Our business is a micro-business; we have multiple things going on. We need to have multiple revenue streams to compete against the large retailers. Our model is different, but that’s because we want to build a brand that stands for something.”

Long-term goals are modestly ambitious. “I don’t want to be Starbucks,” he said. “I want to be The Reefinery. I want to set up a franchise model based on The Reefinery, where I can go in and train people how to be good general managers. I want to make people successful even as I spread my wings.”

Advertisement
acrossinternational.com