The legal landscape surrounding the cannabis industry may be changing on a state-by-state basis, but it remains illegal at the federal level. This roadblock has not only tempered investors’ eager hands but has also defined the way that many startups have scaled up. Many companies focus on a specific aspect of the cannabis supply chain and usually operate within a handful of states in order to steer clear of any regulatory violations.
For Grassroots Cannabis, the barriers to scaling up were simply challenges to be overcome
“We have been dubbed by some people as the largest multi-state operator that no one has heard of. We started off in Illinois in late 2013 when the state passed a law putting a cannabis program into place,” Mitch Kahn, company CEO, tells AgFunderNews. “After doing a bunch of research and getting our heads around the industry on the West Coast, we saw an opportunity to be a significant part of the entire industry as it grew up and to have a hand in how the industry developed.”
Today, the company operates in seven states and plans to add two more states to its roster by the end of the year. In most of these states, Grassroots operates as a vertical integrator overseeing growing, processing, and retail sale of cannabis products. By Kahn’s estimates, there are only six to 12 other so-called multi-state operators that are operating at a similar scale and range.
How has the company accomplished such a feat? From an internal business standpoint, Kahn identifies two key factors that have helped Grassroots achieve multi-state operator status.
Under today's unique circumstances, AgFunder is re-opening Fund III for a limited time to enable investors to join our mission and invest alongside us as LPs in a second close. Learn more here.
“It’s the same answer as when someone asks what the most challenging part of the business is: it’s people,” explains Kahn. “We have built a terrific team to date and continue to add great talent. Four years ago, attracting real talent was a big challenge. Many of the people who wanted to work in the industry were folks who were passionate about the plant and who were involved in the movement long before the current legal push.”
As evidence of cannabis’ move to mainstream, Grassroots is preparing to announce the addition of a CMO from a high-profile US-based CPG company. Had the company pursued her four years – or even six months ago – Kahn thinks she wouldn’t even have considered joining the cannabis bandwagon. Grassroots has also added senior talent from Amazon in recent years.
In addition to people, Grassroots attributes a large slice of its success to winning the competitive state-based licenses that are required to operate a cannabis business within a jurisdiction’s borders.
“It’s super competitive to get licenses. We have a team that is very adept at knowing how to understand what the states are really asking because often times it isn’t so clear when you are reading the applications,” explains Kahn. “So, it’s about writing in a clear, concise, and direct way and writing in a way that is targeted to the ultimate people who will grade the applications. That’s part of the trick, understanding who is doing the grading and what they care about most.”
From a consumer-facing standpoint, branding has been a central focus for the company. Operating as a grower, manufacturer/processor, and retailer, it is critical to maintain some type of brand continuity.
“We think in large measure that branding is one of the likely places where the winners will ultimately be determined in this business,” says Kahn. “It will be about building a brand. As you look around the US, there are lots of examples of brands that have become significant and the entire way the CPG world has been developed in terms of branding is a good prototype for how this business will involve.”
Hamstringing the brand momentum for Grassroots and other multi-state cannabis operators, however, are the regulations that prevent companies from operation across state lines. This will make it more difficult to build a national brand and to distribute products in multiple storefronts, says Kahn.
What will potentially tip the scale from a state-by-state highly-regulated business to a national market, however, is the staggering diversity of customers that Grassroots serves on a daily basis. Kahn cut his retail business teeth in the sporting goods big box market, where the core customer was easily defined as 30-45-year-old man.
“There is no way to define a core customer in our business. It ranges from minor children who are using cannabis products due to serious illnesses to more recreationally oriented patients in their 20s and 30s, to people in their 60s or 70s using the product to cope with sleep issues, pain, or cancer,” he says. “This incredible range of customers is one of our biggest opportunities and one of our biggest challenges.”
Although there are a handful of other companies operating at the same scale as Grassroots, Kahn sees some keen differences that sets Grassroots apart, starting with what he sees as the quality team behind Grassroots’ label. He also highlights the company’s heavy retail-based background.
“We started on the retail side, we have a tremendous background in retail. I think that focus and approach brings a different understanding of the patient base and therefore also of the product needs,” he says. “We think we dial into those product needs as well as if not better than most.”
As most cannabis executives are quick to note, however, there is a high degree of collegiality in the industry. Instead of seeing one another as competition, cannabis companies tend to refer to one another with a sense of camaraderie and encouragement – even when it’s a direct competitor.
“I don’t view the other companies as competitors. We do business with so many of them in multiple states. We have great working relationships together.”