Considering the commoditization of cannabis and increased competition in the landscape, choices made at the very beginning of getting a facility operational have become more critical than ever.
I’ve assessed over 100 facilities and counting and there are some true gems out there. Likewise, there are also some real tragedies. In those cases, what went wrong?
When giving a presentation at the recent CWCB in Boston, during Q&A someone asked, “What are the biggest mistakes you see people make when setting up operations?” I joked that I could probably give an entire presentation just on that topic, and thus this article was born.
I’ve seen this question addressed specific only to cultivation, but I’ve detailed each mistake and the consequences of making it, specific to facility type.
Mistake #1: Selecting the wrong real estate
Whether it was the only piece of property zoned properly, or the building was cheap, real estate that isn’t ideal will stifle an operation’s growth and make it difficult if not impossible for businesses to compete.
- Little to no expansion possibility
- Inadequate employee parking, which can erode community support
- Insufficient trucking infrastructure – increases costs since you may have to supplement with additional freight services
- Insufficient utility connections – This could lead to a lengthy installation process that could cause major delays, challenging the possibility of being up and running within the mandated window
- Nuisance neighbors who could instigate expensive legal issues down the line
- Old decaying infrastructure that will require expensive and timely renovation
Dispensary owners face challenges when choosing a location because regulations often require strict 500-1000 feet buffers from all churches, schools, day cares, and a list of other types of buildings. Understandably, some owners end up settling on real estate for no other reason than it meets regulations. While this is definitely a huge and often difficult accommodation, there still needs to be additional strategy involved in the choice.
- Inadequate customer and employee parking
- Nuisance neighbors
- Having no expansion possibility or conversely having too much space – then you’re needlessly increasing your burn rate
- Dangerous / undesirable location, where consumers aren’t comfortable frequenting
Mistake #2: Blindly rushing to be 1st to market
In nearly every state, there’s a specific date when regulations go into effect, thereby marking opening day for the market. It is now common for states to issue licenses and mandate a timeline between 6-12 months for facilities to be operational. This inherently creates a rush to get everything done on time but it also tempts others to beat the competition, at all costs.
I’m not suggesting that the first-to-market benefits should be ignored entirely, but there are more prominent factors that will dictate longterm success.
While more important in open markets, in a closed Med market like New Jersey’s, where there are only 6 licences in total, the facility that was fourth to open is currently the highest grossing operation.
- Layout and workflow is ignored leading to inefficiencies and added costs
- The lifespan of the building can be limited because of contamination risk
- While you may have a runway for a little while, short-term profits will quickly be eroded by competitors who paced themselves and planned a scalable operation
For a dispensary, you should have a timeline for training staff and implementing inventory management, and beyond that timeline, there’s really no point in being operational any earlier. You should be timing your opening with the readiness of cultivators and processors if licenses are separate.
Mistake #3: Not counting every penny
Owners are often what I call “cannablind,” meaning that they’re blinded by otherwise standard business logic just because they’re in the cannabis business. While certain markets afford fat margins in this industry, fierce competition is eroding margins in every segment, in nearly every region. Without applying standard business discipline to this industry, insolvency is imminent.
Mistake #4: Not asking for enough during a capital raise
This is related to mistake number two since they seem to go hand in hand. Insufficient investment in technology, speed and volume of the operation, and future expansion handcuffs operations and puts them at a disadvantage compared to those who invested properly and scaled gradually. This is a mistake that I often find myself begging people not to make if they’re trying to fund their facility design and build out with their first round capital raise. Ask for more money if you need to. An optimized facility is one of your best soldiers in terms of sending money home. Just make sure you have the info you need to back up your ask when you’re pitching to investors.
- Lack of benching infrastructure leads to poor use of space and substandard yield/SF
- Inexpensive equipment breaks down more frequently leading to inconsistent product and often an increased total cost of ownership
- The cost of production may drop so quickly that without significant future investment and renovation, competing may no longer be possible
- Cheap retail design typically produces a poor customer experience which stifles repeat business
- Careful consideration should always be given to brand identity, which takes time. Without it, stores are forced to compete on price alone, which initiates a vicious race to the bottom.
Mistake #5: Facility designed improperly
While many end up here as a result of falling victim to mistakes 1 and 2, design considerations are their own category. While cannabis cultivation facilities are strikingly similar to many commercial agricultural facilities, and cannabis dispensaries often resemble pharmacies particularly in medical markets, each has a set of unique criteria that mustn’t be overlooked.
- Inefficient workflow results – you can’t silo properly, or end up with lots of wasted time spent transferring product further than it needs to go from station to station
- Logical expansion isn’t possible
- Pest and/or mold/mildew contamination is inevitable
- Due to contamination the facility has a shortened lifespan
- You could sacrifice opportunities for energy efficiency, which could be more critical down the line as the industry streamlines energy regulations
- Secure inventory receiving is often overlooked
- Patient privacy is often compromised during times of high volume
- Bottlenecks begin to appear in patient flow
- Focus shifts more to getting patients in and out instead of their customer experience and education
Mistake #6: Wrong professionals leading the project
The best person to oversee the construction of a new cannabis facility is an experienced operator who understands both cannabis and engineering. They should always serve the role of an owner’s representative. Most often, an architect or general contractor with no cannabis knowledge is leading the project and overthinking and overspending with every decision.
- Architects and engineers try to design a facility more fitting of Pfizer
- Cannabis-critical design elements are overlooked, like having a decontamination room prior to entering the facility, or overlooking the pressurization schematic for cultivation areas
- Key equipment decisions aren’t given appropriate consideration
- Cold, sterile, pharma-retail could be the basis for design
- Security features override and mask the feeling of wellness
- Could be too heavily focused on keeping patients inside instead of turning over revenue