High-Low Pot Sales

To hear David Albanese tell it, the coronavirus outbreak has been good for the cannabis industry. Albanese is chief executive of High Farms, a consulting firm based in Mission Hills for medical and recreational marijuana businesses in California. The company also operates a pot delivery service. While not giving exact numbers, Albanese said that in-store sales of cannabis products has increased in the past two months and that deliveries of marijuana have also taken off. Some single stores are doing double or triple the amount of delivery business they had done prior to the COVID-19 pandemic taking hold in the U.S., he said. “The cannabis industry has been thriving, really,” Albanese added. “It is busier than ever. For us, it is great.” According to Headset, an analytics and data provider to the retail cannabis industry, California had $319 million in sales in April, an increase of 78 percent compared to the same month a year ago. The state had some 5 million transactions, with an average spend of $62.84 per transaction. Dispensaries were able to stay open as they belong, with grocery and liquor stores, in the essential category when Gov. Gavin Newsom issued the state’s stay-at-home orders in March. But Aaron Justis, president of Buds & Roses Collective, a dispensary in Studio City, said that for his business, the coronavirus has brought a lot of challenges. “Sales are down, and costs are up,” he said. “It has been challenging.” Justis works from his home these days, not needing to go to the dispensary. His management team has cut back on its hours, going from 40 or 45 hours a week down to 25 hours a week. Store hours have been cut by 30 percent, he added. For the employees, he ordered personal protection gear and cut down the number of point-of-sale stations from four to two. Customers can now enter the store without having to touch the door. “As soon as we could get it, we ordered plexiglass sneeze guards for the reception area and the cashier counters,” Justis said. So what differentiates a thriving pot business with one that has seen a drop in sales? Albanese pegs it at the service the stores offer. “No business is exempt from judgment by consumers,” he said. “If anything, the pandemic is reason for dispensaries to be more responsive and attentive, not less.  Justis, however, cites the differentiators as the amount of taxes that cannabis businesses pay, with 40 percent of revenue going directly to state and local governments; that people are struggling financially and preferring to buy value products, which of course sell for less, therefore translating to less revenue; and that using cannabis is a social activity and less socializing means less consumption. “We are barely marketing. We want our customers to get the cannabis they need, and we are finding value products and promotions for them, but we are not trying to get a rush of customers in at once,” Justis said. “We are trying to keep everyone safe, that is our first priority.”  License bidding High Farms serves the cannabis industry by helping clients comply with the law and segue from the underground economy to the lawful marketplace. While Justis and Buds & Roses are not clients of the firm, Raj Pottabathni and his business Jiva are. Pottabathni is part of the ownership group of High Farma Inc., which includes High Farms, that applied this month for one of eight or up to sixteen retail licenses to sell cannabis goods in the city of Oxnard. He added that it has been a good experience of working with Albanese and his team. They have been receptive and taken his advice towards developing a comprehensive request for proposal application for the Oxnard commercial cannabis business retail storefront opportunity. “I admire their local reach and really wanting to serve the city and county and its residents,” Pottabathni said. “That is their strongest suit.” Jiva has five retail permits in the state that are all in various stages of the pre-construction. He, through strategic partnerships, will be opening in San Bernardino, San Francisco, Santa Rosa, Union City, and Hayward. Albanese said that Oxnard twice delayed the deadline to submit applications due to the coronavirus outbreak. That was fortunate, as it gave the High Farms group a chance to put together a solid proposal. “They have a point system with different phases and things of that sort,” Albanese explained. “It was a little more involved process. We needed as much time as possible to have a fighting chance when they are only giving out eight licenses and there are 50 applicants.” Growing competition Along with the challenges faced by cannabis business due to COVID-19, there are others as well. For one, there are bigger companies entering the market, backed by Wall Street or Canadian money, Albanese said. He foresees that during the next two to three years, the value in the cultivation side of the cannabis industry will decrease and the retail market will be the real value. “The farming and manufacturing is going to be really streamlined and the only way to make a decent profit is on the retail side of it or the brand side of it,” Albanese said. Justis pointed to the lack of access to banks for cannabis companies as a challenge. The U.S. House this month included the language of the Secure and Fair Enforcement (SAFE) Banking Act of 2019, which would prohibit banks from being penalized for providing services to legal marijuana businesses, into its next coronavirus assistance legislation. Senate Republicans, however, have balked at the proposed law. “We have been deemed essential and the government is talking out of both sides of its mouth,” Justis said, in how the federal government still classifies marijuana as an illegal drug despite numerous states having legalized it. “If we are an essential business, we need to be on a more level playing field.” Competition among cannabis businesses gets tougher every month, as more municipalities open up to allowing the drug to be sold, Albanese said. “A year ago, there were only a handful and today nearly half the state is offering cannabis,” he added. He gave an example of how the lease rates for cannabis facilities, which started out at $5 to $6 a square foot have declined to $2 to $3 per square foot. “Landlords were getting greedy because the cannabis guys were willing to pay exorbitant amounts of cash,” Albanese continued. “As more municipalities open and there is more opportunity of obtaining licenses, then the value of that is going down with the lease rates.”