Dispensary Gold Rush

California is well on its way to becoming ground zero in the competitive battle for cannabis dispensaries. No less than 40 companies from Canada and other US states are aggressively making acquisitions to establish themselves in the Golden State. Last year at this time there were over 2000 dispensaries, today there are 500 and by this time next year we may be back over a thousand. However, the ownership profile will change dramatically as more and more well-funded companies, offering cash and stock, will look to acquire California domain expertise in retail.

Why the focus on California? Obviously its big. Add to that the prevailing wisdom of the large-scale players is – “if you’re in Cannabis, you must be in California”. Just as important as market size is the sheer complexity of the CA market. With ever shifting sands driven by herky-jerky state regulation, evolving taxation across our 58 counties and a befuddling testing environment, CA operators are nose to the grindstone making sure they get and stay compliant. While CA retail owners focus day-to-day, well-funded multi-state operators roll in with an army of lawyers locking down every available retail permit (yes, even Coalinga). Add to that the inorganic strategy of acquiring retailers outright and you have a verifiably frenzied Green Rush. Chaos creates opportunity and well organized companies with strong balance sheets are taking advantage.

The main difference between CA and other states can be best summed up in one word: competition. In other states, particularly on the east coast, markets are “limited license” markets. This simply means the state has decided to release a small number of licenses in a competitive bid process. While these process are expensive, the winners can count on strong ROI if they garner a license and be in pole position for additional licenses when those markets gradually expand. California on the other hand is a bit of a free-for-all (or “fee for all”) fraught with complexity and low barriers to entry. Many CA dispensary operators are also very well connected politically in their local jurisdiction but rarely stray outside of the home market.

Another intriguing element to the strategic initiative of non-CA players is that for many of the newcomers the dispensary acquisition strategy is not their end-game. Most companies, if not all, are pursuing a strategy of vertical integration and dispensaries are the table stakes. The real goal of many companies behind the dispensary roll up is building a brand. The dispensaries are just a necessary end point to drive customer engagement while learning how to build products that fit the numerous consumer profiles, medical and rec. The ultimate objective? The Starbucks of weed.

So what does all this mean for CA dispensary operators? You can simply expect a continued onslaught of buyers poking around your business with the goal of offering you a lot of stock and a little bit of cash to sell. These forays can be distracting and time consuming to dispensary operators. For those who truly want to sell, the first thing to do is to get prepared. This means audited financials and cleaning up your corporate hygiene (IRS?). Among other issues these will dramatically increase the likelihood of closing a transaction. Once you’ve prepared the best way to optimize valuation is to speak with all 30+ active buyers at the same time and create a competitive bid process. Bottom line – you should be driving the process, not the other way around. Don’t fall victim to the tail wagging the dog…

0 replies

Leave a Reply

Want to join the discussion?
Feel free to contribute!

Leave a Reply