The iconic Scottish-American industrialist and philanthropist Andrew Carnegie built his considerable fortune and status as a manufacturing titan on the back of his insatiable pursuit of cost reduction through efficiency.
After making a small fortune in the burgeoning rail industry, the young Carnegie was ready for his next opportunity. He had become privy to a revolutionary steel-making technique called the Bessemer process, which used molten pig iron to generate significantly higher output with a fraction of the labor. Carnegie built the first Bessemer plant in the United States in 1875 and subsequently went on a mergers-and-acquisitions spree, buying up inefficient steel manufacturers and converting them to Bessemer plants. Over a fifteen-year period, Carnegie reduced the cost of steel from $100 to $18 per ton and built the lions’s share of what would become the world’s first billion-dollar company: U.S. Steel.
The introduction of the Bessemer process to the United States ushered in a new era of industry and upended a more than century-long assumption that division of labor was the key to unlocking growth, as Carnegie’s countryman Adam Smith outlined in The Wealth of Nations. Carnegie established a new order: Technology followed the demands of industry, and significant increases in margin were realized by automating processes to find gains and save pennies.
Today’s cannabis industry might benefit from studying Carnegie’s mindset. With new capital allocations at their lowest in years and balance sheets being squeezed by rising inflation and falling prices, adopting lean principles and taking a ruthless red pen to unnecessary line items looks like the path to greater profits.
“These phases can be super exciting for businesses, but they can be stressful for the people who just want a job,” said Andreas Neumann, chief creative officer at Jushi Holdings Inc. and a veteran of the ebbs and flows of fast-growing industries. “The companies with intrapreneurial, spirited employees probably have the biggest chance to survive because they contribute to the goal of the company and can get on board with the need to be super-efficient.”
We spoke to companies big and small throughout the industry to see how they are meeting a moment that calls for financial prudence, smarter processes, and buy-in from teams on the concept that margin—not revenue growth—is the key performance indicator (KPI) companies should prioritize during tough times.
Shaving COGS
4Front Ventures is one of the industry’s masters of low-cost manufacturing. The multistate operator (MSO) was founded in 2011 by a pair of Washington-based entrepreneurs with backgrounds in the fish-packing industry, where slim margins and high spoilage require a tremendous emphasis on efficiency.
“4Front’s DNA comes from high-velocity, high-turnover industries,” said Josh Krane, vice president of operations. He credits the company’s origin in Washington, which went recreational in 2012, for the team’s experience with operating efficiently in mature markets. “Washington became a commodities marketplace with eroding margins very quickly, and we have continued to lead the market in that environment,” he said.
The company’s leadership realized commoditization would be the norm in every market. They believed thriving in the future would require embracing automation, industrialization, and a culture of constant refinement; consequently, they prepared for exactly that from the beginning. The philosophy hasn’t changed. “Once we get a new machine and production line up and running, we layer KPIs on every step of the way and begin fine-tuning,” Krane said.
As an example, he pointed to the company’s pre-roll operation, which produces products for 4Front’s popular owned brand Island and others. The production line operates four machines, each capable of producing 1,200 pre-rolls per hour—up 50 percent from where the system began.
Optimization goes beyond the machines and into the labor force, where the company has lowered costs considerably by studying how the staff moves on the line. “If we notice a person is putting a tool down, picking it back up, stuffing the joint, putting the tool back down, twisting it, putting that tool down, then picking up scissors and clipping, we’ll make suggestions for how to improve that,” Krane said. “We’re trying to reduce the amount of human touches down the production line to shave the COGS [cost of goods sold] and achieve the highest volume at the lowest cost.”
He added making the staff familiar with KPIs and encouraging them to beat targets has fostered a culture of continuous improvement. “When you tell your team they did 200 [pre-rolls per hour] last week, the natural human tendency is to aim for 205 the next week,” he said proudly.
Learning from experience
Jushi operates more than forty stores nationally and has been ruthless in its goal of cost-cutting and margin expansion, focusing on transaction time as a primary target.
The store that best exemplifies the company’s goal is in Tyngsborough, Massachusetts. Jushi executives nicknamed the small, unassuming dispensary barely separated from New Hampshire by the state line “The Train Station” because the operation is unusually efficient. With 95 percent of orders placed online, the location functions more like a drive-thru Starbucks than a standard dispensary. “We’re down to two minutes per transaction,” said Neumann.
The dispensary debuted during the coronavirus pandemic and was not allowed to open its shop floor to the public. However, curbside delivery was an option, and consumers embraced it in droves—which would have seemed outlandish prior to the worldwide health emergency.
Keen to unlock the secrets of the most efficient store in the company’s footprint, Neumann sent Jushi’s user-experience researcher to study the workflow and examine user experience and customer experience, a pair of terms borrowed from tech design but applicable to any business-related issue.
“I was really interested in understanding how the staff moves, where the vault is in relation to the packing areas, things like this,” Neumann said. “We studied it and took the learnings back into our other stores with a goal of improving systems and removing friction for our team and the customers.”
Today, the company employs across the country what it learned from The Train Station study, experimenting with shutting down sales floors to operate as ecommerce-only on slower days. Even when customers walk in off the street, those who don’t need dedicated personal attention may visit a budtender at an express counter and place their order on an iPad. The process is akin to ordering online but happens in the store, with faster processing and a fraction of the labor costs associated with more conventional retail operations.
Neumann, a former advertising photographer and tech entrepreneur, considers the focus on removing friction for the company and the customer essential for improving the experience for both. “This is design thinking,” he said. “I don’t see other cannabis companies looking at their operations like this, but they should be.”
Modifying the model
Delivery is a notoriously low-margin business that works well only at a very small scale or very large scale. Hundreds of small, hyper-local cannabis delivery services operate throughout the U.S., but only a handful of large, multistate players exist, with Eaze the largest of them all.
“The advantage of delivery is you can get off the ground for relatively low cost, but it’s incredibly expensive to scale,” said Chief Executive Officer Cory Azzalino.
That’s part of the reason Eaze is no longer just a delivery company. After merging with Green Dragon in 2021, the company significantly pivoted, becoming a retailer and brand-heavy MSO with a presence in four markets, only two of which offer delivery (California and Michigan). The company-wide restructuring post-merger created a considerably leaner organization Azzalino said is on track to register its first cash-flow-positive quarter.
At the heart of Eaze’s turnaround is a frank reckoning with the economic challenges of delivering cannabis at scale. Delivery distribution hubs often are forced into the same expensive “green zones” as retail, making the overhead relatively similar. So, the company looked to quick-service restaurants like Domino’s, which have low-cost storefronts and thriving delivery operations, and began exploring the viability of the model in California, where Eaze now owns two stores that function as delivery hubs.
“It became very clear to us the best path forward is to have 100 storefronts that are low-overhead but do a few million dollars in walk-in revenue, and then you have the delivery business layered on top, expanding the store’s radius ten to twenty-five miles,” said Azzalino.
He added the company’s best-performing locations combine retail and delivery and, in the future, Eaze plans to build a footprint of stores first and layer delivery on top of those operations.
“Delivery is still our unique superpower. It’s still what we do better,” he said. “We have a lot of custom software, [standard operating procedures], and brand power in the marketplace. People know to come to Eaze for delivery.”
Stepping up technology
Cultivator POSIBL has staked its future on being one of the most efficient producers of flower in the Golden State. The young company’s 100,000-square-foot canopy in Salinas, California, is located in one of the country’s most productive agricultural regions, known for its exceptional climate, longer growing seasons, and experienced pool of agricultural employees.
POSIBL was started by a group of Mexican agriculture and distribution professionals who applied their extensive experience growing and moving table grapes, tomatoes, and cucumbers at scale to a product with better margins and longer spoilage timelines.
“There’s no reason why cannabis has to be grown indoors, especially in a place like California,” said CEO Jesus Burrola. “This state has abundant sunlight, great temperatures, and humidity. These really are ideal growing conditions.”
The company’s goal is to lean into a cultivation method that can produce a sustainable, cost-efficient, and high-quality product year-round using an automated, mixed-light “smart” greenhouse in the optimal climate, particularly as energy prices continue to rise.
“Everything inside the greenhouse is automated,” said Burrola. “We have a weather station outside that measures humidity, temperatures, and sun intensity. If it’s too hot, the computer tells the greenhouse to open the vent or turn on the fans. When we get to peak sunlight hours, it tells the greenhouse it’s time to turn off the lights.”
POSIBL’s system requires less water and is three times more energy-efficient than growing cannabis indoors, Burrola said. The company also has invested in carbon dioxide automation and upgraded its irrigation system to increase yield by more than 35 percent this year while simultaneously reducing the cost per pound and improving quality.
Slashing common costs
California house of brands Ciencia Labs is weathering choppy industry waters by wholly embracing a lean philosophy, micromanaging costs, and encouraging competition between suppliers. Sourcing ingredients for its gummies from a wide variety of providers has become an important source of cost-cutting for the small, bootstrapped manufacturer.
“If it’s commoditized, we shop around for the best price every single time we buy,” said co-founder and CEO Benjamin Mitchell. “We ask other suppliers to beat the lowest price we find, and we work with whoever is the lowest. If it’s not commoditized, we’ll still have multiple approved vendors and don’t mind encouraging them to compete.”
Mitchell is driven to trim fat, and he helped his company respond to the realities of California’s flailing market by introducing a “competitive scarcity” mindset. “Getting a big order is a nice thrill, but trimming $1,000 off a packaging order or combing through QuickBooks looking for a few dollars to cut feels even better,” he said. “We want our team to feel that same thrill when they can push costs down.”
In lean times, Mitchell believes every expense is fair game for cost-cutting, and owners need to take an active role in finding potential savings. “Scaling a team, handing off duties, and delegating is great, but those are for boom times,” he said. “In bad times, you have to shrink and take back the duties that allow you to find savings. Dig into your books, get down on the ground level in your business, and do the purchasing yourself.”
How these companies approach labor
The ongoing spate of layoffs is a visible symptom of the industry’s slump. Curaleaf, Trulieve, Weedmaps, Dutchie, and countless smaller companies have released employees over the past year as businesses seek to streamline operations and balance budgets in the midst of turbulent market dynamics.
Eaze undertook two rounds of layoffs, primarily trimming the headcount in middle management. Azzalino believes this helped make the company more dynamic and empowered employees at every level to take more ownership over their domain.
“We needed to flatten the organization,” he said. “We also made the decision to push more information down to lower levels so people can make more informed decisions and have more clarity over who owns specific decisions within the organization.”
Like 4Front, Eaze encourages teams to track their KPIs and strive for marginal gains that may conserve resources. “When you’re at the $200-million scale and paying $40 million to $50 million in payroll to drivers, making the right small decisions across a lot of locations adds up to pretty big numbers pretty fast,” Azzalino said.
Retaining an optimal workforce in the midst of downsizing can be challenging. Larger companies sometimes extoll the virtues of mainstream consumer packaged goods (CPG) companies’ increasing reliance on automation as a cost-cutting measure, but in cannabis automation may not be the best solution for everyone. “The [old guard] understands what you need to do to get the kind of yields that make those folks from CPG actually useful,” said Kevin Schultz, founder of The 357 Company and former vice president of optimizing sales and operations at Verano. “If you don’t have a lot of good product coming to the packaging room, what good is the CPG person and their automation?”
Balancing an organization’s roster of experienced legacy workers and CPG transplants is key to delivering the best product at the lowest price, he added. Legacy companies understand the plant and the consumer extremely well, while CPG companies know how to automate processes and increase efficiency.
“I’ve seen a few companies where the [old guard] didn’t get respect from the higher-ups, and then I’ve seen others where they were considered a key contributor and given a seat at the table,” said Schultz. “Without respect from the higher-ups, the [experienced traditional worker] typically was forced out over time or decided to leave after their ideas and requests for resources fell on deaf ears.”
In his opinion, the companies that respected and provided resources for legacy workers to implement their ideas typically had “better products, a more popular brand with consumers, and a better reputation within the industry in general.”
While Ciencia Labs reduced its headcount in the past six months, the startup was careful not to let middle management swell as it scaled during the boom times between 2020 and 2021. Instead, the founders focused on hiring tenacious, entrepreneurial talent and staying in close contact with the staff.
“When the going gets tough, there is no room for middle management,” said Mitchell. “We pay a premium so we can hire, nurture, and grow the best, hardest-working employees. One great employee gets more done than two mediocre ones.”
Jushi’s Neumann is a startup veteran and has been through major contractions in other industries. When he worked at Saatchi & Saatchi in London in the mid-2000s, the advertising industry was undergoing significant disruption as digital media emerged, and the agency was forced to reduce its 1,000-person workforce. “The CEO and I often used to say we could run the place with 100 of our best people,” said Neumann.
Jushi also laid off staff within the past year, but the company retained productive “generalists”—people who can produce results in many areas—rather than specialists. Having a proactive, entrepreneurial team is a major advantage in this environment, yet Neumann noted some publicly traded companies employ people who just “go from meeting to meeting.”
“The people who add value should always be there, and those who don’t add value, you probably don’t need them,” he said.
Takeaways
The companies that will make it through these choppy waters are exploring every available opportunity to improve the efficiency of their operations. The hangover from the halcyon days of cheap money, wide margins, and an unwavering sense of legislative inevitability is destabilizing many companies, but those that can adapt to a Darwinist environment will be much more stable as a result.
“Weed has had the luxury of high margins for so long that this focus on efficiency wasn’t always necessary to have a successful brand,” said 4Front’s Krane. “There are plenty of people out there today who are successful in weed but not necessarily efficient behind closed doors. We always knew we were going to end up here, so we decided to pretend we were here from the beginning and operate in anticipation of margin compression and commoditization.”
POSIBL’s Burrola believes survival comes down to effective deployment of technology in the service of efficiency. “The past eighteen months have stress-tested every operator and their assumptions about how low wholesale pricing can be,” he said. “As the industry consolidates, only the most efficient operators will survive. Efficiency requires a culture of continuous improvement and leveraging of technology at every step of the process to remain price-competitive while maintaining quality. There is no room for error.”
Controlling the cost of goods sold is at the heart of operational efficiency in manufacturing. No one can prevent wholesale prices from taking a nosedive or force enthusiasm into capital markets, but every business can wade into its costs and establish the essentials, non-essentials, and luxuries—and begin culling appropriately.
If Andrew Carnegie had been a cannabis magnate, he no doubt would have flourished in this moment. It has been said the greatest source of his operational success was his relentless focus on reducing costs, which he considered the only part of his business he could control.
“Show me your cost sheets,” he once said. “It is more interesting to know how well and how cheaply you have done this thing than how much money you have made, because the one is a temporary result, due possibly to special conditions of trade, but the other means a permanency that will go on with the works as long as they last.”
