When starting a new cannabis cultivation business one of the most important decisions is the cultivation method. Growing in soil, coco-perlite or hydroponics will determine the quality of your final products in a great deal and also your cost of production. In the past year I have seen countless entrepreneurs applying for a license in states like Massachusetts, Illinois, Missouri and Michigan, most of them focus on getting a license and rely on technical writers or a grower friend to decide on their cultivation method. But going this route, making such a critical decision without understanding the economics of such a critical business path is not a good strategy.
DO YOUR RESEARCH
When we started the Verde Natural grow in Colorado back in 2015 we did an extensive research to understand the difference in cultivation methods and found 3 types of growers:
- Outdoor growers, mostly growing in soil during the main season in an uncontrolled environment, producing a low tier class of flower.
- Indoor coco-perlite or hydroponic growers producing an average quality of flower using synthetic inputs in a controlled environment.
- Craft living-soil cannabis growers who produced the highest quality cannabis in the state. Most of which were too small to gain from the economies of scale of a commercial facility.
After understanding the quality of these 3 types of flower, we gravitated towards the living-soil cannabis (which uses mostly organic nutrients) but needed to understand the economics of it to make a decision. And the numbers weren't bad at all. I figured that with a 10,000sf canopy I could produce $1,000 pounds of the best cannabis in the state. And that's what we did. And we sold them for an average of $1,750 per pound during the 4 years I operated as the CEO.
But, the challenge that most people brought up was whether we would be able to produce the same craft quality in a larger scale as the artisanal growers do in a small grow. People said, you will either loose quality or not have the margins to compete with the other “top shelf hydro” producers.
We figured out a way to make it happen and became the largest indoor living-soil cannabis cultivator in Colorado in 3 years. This strategic differentiation was key because from the beginning we understood that the market would commoditize with so much similar “mass-market” cannabis flower being produced and no real brands.
We also knew that brands would gain market share and now we see the large mainstream brands like MedMen and Canndescent starting to dominate the mass-market in some states. Those public or VC-backed cannabis companies will inevitably win the mass market in our industries and will become the Budweisers of cannabis. They have the largest marketing budgets and the best ability to operate in multi-states rapidly. So, who can really compete with them? For sure not a smart strategy for a small or medium entrepreneur applying for a new license.
The strategy of differentiation by quality has worked very well in other industries and a clear example is what happened in 2017-2018 in Colorado when the wholesale prices crashed.
The average wholesale pound in Colorado for an indoor hydro grower in Colorado in 2016 was $1,400 but a year later with commoditization started a race to the bottom. Stores had the same type of flower (the deli style didn't help) and stores needed to run specials to draw traffic: $100-120 ounces turned to $80 ounces and the average wholesale price dropped to $900 per pound. Almost a 40% decrease for most mass-market growers. For us, the prices lowered from $1750 to $1,650, a mere 6%. That’s when I saw the power of strategic differentiation: A true blue ocean strategy.
But it is not just the cost per pound and the price per pound, because that is just a unit margin. It is also important to understand yields and volume. Most people talk about yields in terms of pounds per light or pounds per square foot.But what really matters is how many pounds do you produce in a given period of time for a specific area of gross canopy (vegetative and flowering).
So let's look at a 10,000sf canopy including vegetative and flowering rooms over a year. That is a true apples to apples comparison:
When you start a new cannabis business, go with a strategic differentiation, produce something unique that can compete and that you are proud of. At WHOLE GROW, we help our clients design, plan and implement their new cannabis cultivation operations using a proven method that can make them successful and that give the patients and consumers a truly premium cannabis product to enjoy.