SXSWeed: Cannabis Track Tackles Big Issues

From legalization to international mergers, investment, and pay-to-play retail, the Iconic festival and conference found much to discuss about cannabis.

SXSW 2019 Tim Seymour Kevin Murphy John Boehner mg Magazine
During a keynote presentation, Tim Seymour of CNBC's Fast Money (from left), Acreage Holdings Chairman and CEO Kevin Murphy, and John Boehner, former Speak of the U.S. House of Representatives and an Acreage board member, discussed the likely paths to national legalization and the challenges and opportunities the industry faces. (Background photo by Carl Holman. All images provided by SXSW.)

AUSTIN, Texas – For a festival that has its origins in local bands playing gigs at small clubs around town, South by Southwest (SXSW) has grown exponentially in size and scope since its inception in 1987. This year, the now-iconic show hosted tracks for film, technology, media … and its latest addition, cannabis.

Whether or not by coincidence, the cannabis sessions shared the halls and conference rooms at the Hilton hotel downtown with crypto and blockchain entrepreneurs, immersed in an industry with similar challenges, opportunities, and unlimited potential for growth around the globe.

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One of the most prominent themes of the conference was the cannabis industry’s international expansion over the past few years, with Canada leading the way as a major investor in the U.S., Columbia, and other weed-friendly countries. Branding and investment were hot topics, as well. Industry newcomers seemed dazed and confused, trying to grab hold of a fast-moving locomotive that zigs and zags with the evolving legislation and regulations from state to state, and now country to country.

As veterans of the industry discussed the complexities and challenges of operating in the industry, the overriding message seemed to be that only thick-skinned, unflinching, and creative operators need apply.

“This industry has some of the grittiest business owners of any, because you have to be nimble and train your staff to pivot with new protocols,” said Keegan Peterson, founder and chief executive officer of Wurk, a human resources and payroll platform for the cannabis industry. “It’s like solving a Rubik’s cube and then somebody comes along and messes it all up, so you have to solve it again every day.”

Cannabis on the world stage

Canopy Growth Corp. founder and co-CEO Bruce Linton discussed the opportunities for companies and investors looking beyond their borders, especially in Europe, Israel, Latin America, and other countries with increasingly progressive public attitudes and policies.

He explained that even though his company may export to Germany and other countries, it’s difficult to negotiate deals when insurance carriers only reimburse patients a small percentage of the time. Currently, he said, he’s more focused on developing intellectual property and patents that will enable Canopy to duplicate its operations as more cannabis-friendly policies are adopted worldwide. In the last few years, representatives from twenty-two countries have visited Canada in the past few years to get an up-close look at its cannabis industry, Linton said, underscoring how strong the interest is worldwide.

“If I was in the U.S., I would be thinking about what [intellectual property] I could file, in any niche areas, and which trademarks I can lock up,” he said. “The globalization of this thing, I think in three years it is almost going to be over.” He noted Monsanto was able to gain a huge share of the tomato market by snapping up patents and trademarks.

Analyst Alfredo Pascual argued Canadian companies aren’t particularly good at building brands and focus primarily on cultivation, which is one of the reasons they are investing heavily in the United States, Columbia, Israel, and other emerging markets. By following the developments in politics and public policy, companies and investors can start to plant the seeds for new opportunities abroad, he said, and develop socially responsible, sustainable businesses that will contribute new jobs and tax revenues for local communities.

Another panel took a deep dive into the data and analytics that are now driving most of the decision-making in the industry.

“The cannabis industry is inherently disruptive and has adapted faster to technology than most [other] industries,” said Cy Scott, CEO of Headset, an analytics and business intelligence platform. “Traditional tech companies are not as quick to get into cannabis, because we need solutions that are unique to the needs of the industry.”

Tahira Rehmatullah, president of T3 Ventures and chief financial officer for MTech Acquisition, explained that during her tenure at Privateer Holdings, the company spent about $1 million to customize an accounting system from a traditional vendor. “We should have just built it from the ground up,” she said. Rehmatullah also served as general manager for Marley Natural. “When I co-founded Marley brands in 2015, I had to piece together information and call dispensaries just to try and figure out who the buyers were.”

The Boehner paradox

By far the biggest draw of the conference was former Republican Speaker of the House John Boehner, who sits on the board of directors for Acreage Holdings, a New-York-based company that is a major player in the industry and operates growing, processing, and retail facilities in nineteen states.

Boehner said the federal government “needs to get out of the way” so cannabis businesses in legal states can begin operating like other businesses, complete with bank accounts and access to investment capital. He expects legislators to pass new bills in the next year or two that will provide companies with these critical services, which would be a first big step toward federal legalization. The STATES Act is one of the bills currently in the mix that would accomplish the goals, and he supports its passage.

“The world is changing, and the federal government hasn’t caught up,” Boehner said. “We are in the very early stages of what is going to be a huge industry.” He also predicted cannabis would top tobacco’s $50 billion in annual revenues before long.

Boehner’s message may have been popular among investors, but a group of protesters begged to differ and staged protests inside and outside the event. They have not forgotten Boehner supported the war on drugs and opposed legalization during his political career, and now he—along with many other politicians and law enforcement officials—are cashing in on the booming cannabis industry in the U.S. and abroad.

Pay-to-play hits the retail scene

MedMen CEO and co-founder Adam Bierman was on hand for a Q&A session and talked about the big liquor and tobacco companies that are starting to invest and operate in the industry, noting it’s validating to see such companies entering the space. “They realize that if you don’t get a piece of cannabis, cannabis will take a piece of you,” he said. Bierman also alleged MedMen enjoys more sales per square foot than any other retail enterprise in the world, yet the company doesn’t have access to traditional banking services.

And speaking of retail space, cannabis is starting to look more like other industries where pay-to-play, or “slotting fees,” is the norm.

Dai Truong, a mergers-and-acquisitions and investment advisor at MedMen, estimates about 30 percent to 40 percent of retail operators charge slotting fees. The practice means manufacturers are guaranteed specific placement and other services for a negotiated price.

“We have to pay the toll in some states where we can build out custom displays to get our brand out there,” said Rusty Wilenkin, co-founder of California-based Old Pal, which strives to keep its products at the cheapest price point in all its retail and delivery outlets.

Julia Jacobson, co-founder of Aster Farms, said her company has a presence at thirty retail outlets in California, but “delivery is the future.” For now, though, “we definitely [pay slotting fees], and it makes a big difference in our sales, because they are mandated to educate consumers on our products, which is an important piece of the puzzle.”

Everything’s bigger in Texas—except cannabis

Medical marijuana is legal in four of the states surrounding Texas, with laws that are arguably more accepting and progressive. By passing the Compassionate Use Act in 2015 Texas legislators made some baby steps, but the program is so restrictive and serves so few patients that it’s likely the smallest weed market in the U.S.

In a 2018 University of Texas/Texas Tribune poll, more than half the state’s registered voters believe marijuana should be legalized. Only 16 percent said possession of marijuana should remain illegal under any circumstances. But for now, Texas cannabis advocates are hoping for an expansion of the Compassionate Use Act by making medical cannabis available to more patients at higher potencies.

Acreage Holdings CEO Kevin Murphy worries Texas could become an afterthought in the national market if legislators continue sitting on their thumbs. He also estimated Texas would have about 3 million customers if the state legalized recreational use.

State Senator José Menéndez, a San Antonio Democrat, is a proponent of medical cannabis. He related the story of his father in-law, a veteran dealing with extreme pain from lung cancer who wouldn’t even try cannabis because it was against the law.

“When I hear the gun lobby talking about gun control laws, they say, ‘all you’ll do is keep guns out of the hands of law-abiding citizens,’” Menéndez said. “And it’s the same situation with cannabis – all you’re doing is keeping it out of the hands of law-abiding citizens.”

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