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  1. Home
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With Cannabis, It's Local

It's not the multistate operators, but the single-state ones that are where the cool kids are hanging out.
By DEBRA BORCHARDT
May 17, 2021 | 07:45 PM EDT
Stocks quotes in this article: TCNNF, HBORF

Corporate cannabis players continue to gobble up smaller players in an effort to expand their empires. But, as the multi-state operators keep getting bigger, the single-state operators are the ones to watch.

The multi-state operators -- or MSOs as they are known -- are growing in size, but getting hit with lots of criticism. Loyal cannabis consumers often complain about the quality of corporate cannabis. It seems that in the race to grow, the end product suffers. This is why some operators are opting to remain single-state operators or SSOs. Plus, the longer these SSOs hold out and remain independent, the price to buy these operations just keeps rising.

'Land Grab'

First, let's look at the rising prices we're seeing as some believe cannabis laws will be eased and MSOs are seeking new territory.

"No question that there is a land grab taking place among the MSOs to plant their flag in what they consider to be key states with limited licenses. There is more of a sense of urgency now. Capital has opened up again and many of these deals are involving more cash versus the all-stock deals seen in 2019 and early 2020," David Feldman CEO of Skip Intro Advisors said.

Feldman said there is a sense that federal legalization is not far away now and the companies want to get as big as they can as fast as they can."

Feldman represented the Keystone Canna Remedies group of three dispensaries in Pennsylvania. TerrAscend acquired the SSO in a deal valued at roughly $70 million. That deal was announced in April and closed in May 2021. With the acquisition, TerrAscend doubled its owned footprint to six dispensaries.

In November, a similar sized group of three dispensaries sold for approximately $35 million to Trulieve (TCNNF) . The dispensary operator Keystone Relief Centers LLC, doing business as Solevo Wellness, had previously announced the deal in September 2020 and it closed in November. Smarter MSOs realize that multi-state doesn't need to be every state.

Private SSOs Cause a Buzz

Longtime California operator Connected has built its reputation around its dedication to cannabis genetics -- and it's why they can demand a wholesale flower price double the market average. The company has said it will not expand if it can't get the licensing and space to grow the exact same California cannabis in the new state. Connected sells its flower for $80 per eighth, and the product typically sells out the same day the delivery truck drops it off. According to Budzu, the average price for an eighth in Los Angeles for high-quality cannabis is roughly $42. This kind of loyalty is not unlike a limited-edition batch from a craft beer brewery. The company's legacy in the space and homegrown reputation have rocketed it to a status symbol among true heads.

New entrants like the quickly growing Michigan powerhouse Lume have also carved out their own unique product line. The upstart prides itself on both its cultivation facilities and practices as well as an easy-to-navigate branding. Lume says there's no need to try and "copy" what went right in one state via white-labeling. As native Michiganders, Lume's CEO and President Dave Morrow said he "gets" the region's fierce state pride and tailors locations and products/events to the shopper demographics' other interests, from yoga to snowshoeing to craft brewing. The company also has exclusive marketing contracts with local entertainment venues, pairing cannabis (and its name) with its natural matches in leisure activities like enjoying live music. Lume's entire strategy is based on convenience and accessibility -- with 15 current stores and a goal of 40 by the end of 2021.

Single Doesn't Mean Small

Single state doesn't necessarily mean a small operation. As one of the first six dispensaries in California, Harborside (HBORF)  has become a staple of the Oakland community. The company is publicly traded and has a market capitalization of $50 million. Harborside has a reputation for making an effort to uplift locally -- and minority-owned -- brands in their stores.

Gage Cannabis (CSE:GAGE) is another SSO that has taken the Michigan market by storm. The company operates three licensed cultivation and processing centers in Michigan. The company grows its plants in small batches using 100% hydroponic cultivation methods for sustainable and responsible operations. From handpicking every plant to employing our proprietary drying, trimming, and curing method, each step of our process is deliberately designed to deliver the best flower possible. The company's full-year 2020 revenue increased 1,972% year-over-year to $39.9 million.

"Michigan continues to report robust cannabis sales, and in March of this year, the state posted $146 million of cannabis sales, which represents an annualized run rate of approximately $1.8 billion. We believe Michigan will be a top-five largest cannabis market in the United States this year," Fabian Monaco, CEO of Gage, said. 

It's All Local

SSOs are able to tap into their local communities and have a deeper understanding of the customer base. They know how to pick ideal locations. Harborside's Desert Hot Springs location is the definition of a strategic location. It's the only recreational drive-thru dispensary in the state, right along the I-10 highway, 10 minutes from downtown Palm Springs and right between Los Angeles and the Coachella Valley. Not to mention the drive-thru portion served them especially well during COVID. Lume aims to have no Michigander more than minutes away from a Lume store.

Investors Watching SSOs

Capital raising has been active in 2021 and retail has drawn the most interest. Viridian Capital Advisors have tracked 98 transactions so far in 2021 vs. 26 in the same period last year. Public companies were the buyers in 82% of 2021 deals and most of the deals are U.S.targets. By dollar volume, cultivation and retail lead the way for most of the capital raises. This is followed by investing, real estate, and software. When measuring the activity of deals, cultivation and retail still lead the way, but it is followed by infused products, hemp, and then agriculture tech.

So it's not MSOs, but the SSOs that are where the cool kids are hanging out. Some of the earlier cannabis companies like Acreage Holdings drastically scaled back their operations after pursuing strategies to be the biggest. In 2019, companies were competing to be in most states. The tables have turned now and cannabis companies realize that expansion for expansion's sake is a losing battle. Selectively expanding to limited license states or going big in a single state is the winning strategy.

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At the time of publication, Borchardt had no position in any security mentioned.

TAGS: Investing | Stocks | Cannabis

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