Expert Advice: How to Scale Your Cannabis Cultivation Business
New cannabis cultivators need every advantage when it’s time to scale their operations.
In the fast-paced cannabis industry, the call for scaling up your business will come sooner rather than later. The competition is stiff, and those who plan ahead for future expansion will be thusly rewarded. As the old saying goes, “failing to plan is planning to fail.”
In some ways scaling a cannabis business is like scaling any other company. However, there are some crucial exceptions in this industry. The playing field is much different in the cannabis space, with regulations superseding each other even as you scale your business. It’s like shooting at a moving target.
The black market, state, federal, and local taxes, local zoning ordinances, a broader choice in automation, and changing consumer tastes are just a few of the hurdles cannabis businesses face as they look down the road at scaling.
Scaling vs. Growing a Business
According to famed business coach Tony Robbins, scaling a business shouldn’t be confused with growing a business. If you’re growing a business, you’re trying to keep up with rising demand without thinking about how to get there. It’s like driving to a destination without a map or Google Maps. If all you’re thinking about is ramping up production or increasing supply, you may suffer in the long run by not meeting quality standards and losing customers.
“Most people are racing to the bottom with pricing because they don’t focus on a quality product,” says Ken Morrow, owner of Trichome Technologies and a long-time consultant to the industry.
Scaling a business is all about preparing a foundation for future expansion and, yes, growth. It’s putting the horse before the cart, not the other way around. It’s putting things in place, including labor, machinery, and processes, to meet the market demands and allow you to be competitive.
If only we had that crystal ball, we would know just what revenue to expect in the years ahead. Unfortunately, we don’t. But what we do have is data. To determine when it’s time to start ratcheting up your business by scaling, you need to examine your existing and potential customer base and size up the competition.
Morrow says cannabis businesses are the only ones having to deal with black market competition. This is particularly true for those who grow and sell medical and recreational cannabis (as opposed to growing hemp for CBD). According to Morrow, the black market is rabid in California and other parts of the country. These growers can offer their product at a much lower cost because they don’t have the taxes and overhead legitimate cannabis businesses have to tack on to their product’s price. Morrow says, as a result, some dispensaries are barely turning a profit.
On the flip side, not all regions of the country suffer from serious black market competition. Plus, a legitimate cannabis company has the potential to produce a more consistent, quality product and offer a broader range of buying options, including edibles, waxes, and prerolls, than black market businesses.
Those in the hemp/CBD space should face less competition from the black market, making it a little easier to scale their business to meet consumer demands.
Like any other startup, cannabis CEOs must look at other factors to drive demand for their products. Are you in a large enough city or region to draw the numbers needed to justify scaling? What are your best customer’s ages and genders? You need to answer these questions before spending the time and money required to scale a cannabis business.
The planning stage for scaling is critical. Suppose it is determined the demand is there. In that case, during this process, a cannabis company can work on growing or acquiring a quality product, deciding on what labor and equipment will be needed, and putting an effective marketing strategy in place.
Finding the Money for Expansion
Morrow says the best business he has encountered over the 30 plus years he has been a consultant to growers and owners scaled up as the money came in; they had no angel investors, no manna from heaven.
“They never expanded until they had the money in their pocket to do so,” says Morrow, adding that if they ran out of a product, they kept the shelves empty until they could replenish it with quality cannabis rather than buy from a third party vendor.
In short, a superior product will drive demand–a company will be rewarded by raising the capital needed to expand.
Besides the black market, cannabis growers have to deal with the high cost of doing business. Morrow sees ridiculous taxes, at least in California, as a significant roadblock to profits in this industry. He says cannabis is taxed higher than cigarettes and alcohol. Growers and retailers in this space also have to deal with the cost of security, a price that more and more businesses have to include on their spreadsheets.
Your cannabis company should consider scaling when the demand justifies doing so. Pay attention to changing regulations and continue to produce a quality product. The successful cannabis businesses appear to be those who scaled up their businesses as they had the cash on hand to do so.