The cannabis industry today reminds me of the tech industry in the late 1980s. It’s the wild west! In the late ’80s and early ’90s, we had tech nerds building and selling computers in their dorm rooms or sleeping under their desks, banging out software while on the verge of bankruptcy. By 2000, they had grown into titans of the industry, running multibillion-dollar companies like Dell and Microsoft.
Before people like Bill Gates, Steve Jobs, and Michael Dell came along, there was no such thing as a “personal computer.” They helped birth an entire industry. The industry was chaotic, with everyone figuring out business models on the fly. Those early days were fun and exciting but also perilous, with no rules. There certainly were many winners and losers along the way, but fast-forward just twenty years and the industry had matured. Consider software distribution, for example: If you wanted to get your product into Chain X, you needed to call on Ingram Micro. If you wanted to get into Chain Y, you had to call Tech Data. The process was organized and clear.
Contrast that with the cannabis industry, where everyone sells to everyone. For hard goods, there must be 100 distributors, and many cultivators and manufacturers are selling directly to retail shops. It’s near insanity.
There’s certainly lots of innovation still going on in the tech space, but the industry itself has matured and become incrementally progressive. This is one of the reasons I was drawn to the cannabis industry. It’s like the ’80s all over again. We’ve witnessed the birth of a whole new industry, and all the players are pioneering things and figuring them out on the fly. Business models are evolving constantly. It’s fresh, new, and exciting.
But this is also the downside to the industry. Many businesses are run by first-time business owners, and arguably there’s a lack of professionalism compared to more traditional verticals. Anyone who has read the book The E-Myth by Michael Gerber will understand what I’m talking about: Just because you know how to grow phenomenal weed doesn’t mean you have the skills to run a company that produces phenomenal weed.
Eventually there will be consolidation and, as the stigma associated with the plant continues to dissipate and the industry clears various legalization hurdles, the space will mature and professional managers for the business side will become much more common. We’re not quite there yet.
Every day I see new shops opening and perpetuating many of the same mistakes because they don’t know any better. Even though co-op marketing programs have been common practice for literally decades in other industries, when I walk into retail stores today and broach the topic, managers look at me like I have two heads.
I get the same reaction when suggesting upselling and cross-selling, both of which are established methods of boosting revenue in traditional retail and offer loads of opportunity in cannabis—especially in two categories: accessories and home-growing supplies. By not offering products in those categories, retailers are leaving easy money on the table.
Do you want fries with that?
It absolutely astounds me how many cannabis retailers do not sell accessories. Among stores that do sell accessories, many push them off to the side or stock them at the back of the store like an afterthought, where they are out of sight and out of mind to browsing customers. These business owners are so fixated on cannabinoid products that they seem to be wearing blinders. I understand the average upscale retailer doesn’t want to turn their space into a cluttered headshop, but there’s a lot to be said for offering a curated selection of quality goods—especially common items like grinders, pipes and bongs, bangers, dugouts, rolling trays, et cetera. Why not increase the chances consumers will pick up an impulse buy at the point of purchase?
There are several reasons why this is important. First and foremost, accessories are profit-boosters. Would you rather a customer buy a $40 eighth and leave, or grab a nice fumed-glass spoon for $30 while they’re at it and nearly double the order?
Think about it from a marketing return-on-investment standpoint. You’ve expended all that money, time, and effort marketing like crazy to drive that consumer into your store for a $40 purchase. Incrementally upselling them a $10, $20, $40, or even $100 item is pure profit (less cost of goods sold, of course). You didn’t have to spend a dime on driving that additional revenue, and you’ve proven your store to be a one-stop shopping experience that delivers. Give your customers the gift of convenience, and they’ll associate that ease and convenience with your store.
Another important consideration: Hard goods are not perishable, and—unlike dispensaries’ main cash crop—the wholesale price may count as a business deduction. Stores that are cannabis-exclusive suffer from Internal Revenue Code Section 280E problems, as we all know. Cost of goods sold (COGS) for accessories is legitimately deductible from federal taxes, lowering income for an added boost to the bottom line.
The home-grow market
Most cannabis retailers I talk to look down on the home-grow market as if it’s some cute niche to be ignored or an annoying competitor to be vanquished. Both ideas are wrong.
Home growers are here, and they’re not going away. In 2022 alone, legal personal growers grew an estimated 11 million pounds of flower, according to a recent study by industry research group New Frontier Data. To put that into perspective, that’s $14 billion worth of product at the prevailing market value per pound. The legal medicinal market sold approximately $12 billion in 2022. It blows my mind to think about this: Companies are raising billions in capital and launching initial public offerings chasing the medical market, all the while dismissing a market that’s outpacing theirs.
The concept that home growing somehow hurts the retail market is unfounded, as well. A good analogy is in the food space: A new Applebee’s opening in town won’t put Whole Foods out of business. Although I grew tomatoes and cucumbers in my garden last summer, I didn’t stop buying tomatoes at the grocery store. There’s plenty of business to go around—and it’s all consumable product, not hard goods. I grow my own flower at home, but I’ll hit up a dispensary if I need concentrates, tinctures, edibles, or other items I don’t care to expend the time and effort to produce.
Some retailers get it. Some are selling seeds and clones. But most do not, instead adopting a defensive posture against home growing. Those who realize the futility of trying to wrestle the proverbial tempest back into the teapot and embrace home growing can see the sheer magnitude of the market and its continued future trajectory. Visionary leaders welcome home growers into their stores, and I guarantee the rest of the industry eventually will follow, whether willingly or begrudgingly.
I’m neither an attorney nor a certified public accountant, so consult your professional advisors, but in light of the recent federal ruling that classified cannabis seeds as unregulated hemp seed, COGS for seeds should be deductible. And while technically perishable, seeds have a long enough shelf life that they are effectively non-perishable, unlike flower, concentrates, edibles, and other cannabis-infused products. Long shelf life and ease of storage make seeds a more sensible choice than clones for most retailers who serve home growers.
If growing at home will bring a consumer deeper into the culture and encourage them to buy and consume more cannabis products, then let them grow and sell them the seeds to do so. This way, even if they’re growing their own, you’re still getting a piece of the action and bringing them into your store, so long as you have seeds and accessories to upsell.
