Grown Rogue Series: Michigan Cannabis Market I (Part 3 of 3)
In part one of our series, we discussed Why Michigan is such an attractive State for Cannabis investment which includes pounds of premium cannabis selling for as much as $3500.
In part two, we shared the undiscovered financial gem that Western Michigan represents, specifically Muskegon, MI.
In this final edition to our 3 part Michigan cannabis series, we focus predominantly on what the Michigan cannabis market means to investors and how Grown Rogue has positioned itself for success in this burgeoning State. What financial returns can we expect from the expansion into this new and emerging cannabis market? We provide the answer in these 5 steps.
STEP 1 – Low Cost Basis
Any good investment begins with a low or reasonable cost basis. If you compare our acquisition cost of the Inferno Gardens assets in Muskegon, MI to most any other Michigan or midwest cannabis acquisition, Grown Rogue has obtained extremely valuable assets at a very low cost basis, when compared to our industry peers.
What Grown Rogue has acquired is the following:
- 4 Licenses in 1 location providing for a valuable vertical integration and potential for strong first mover advantage in the Muskegon-Grand Rapids-Holland metro (>1.3 million population).
- Our retail location here would be only the 2nd in the Muskegon area.
- The Cultivation facility offers 24,000 of indoor flower growing space yielding ~4000 lbs at full capacity.
At approximately $2.5 MM in acquisition costs (of which $2MM is paid back to Grown Rogue as a loan), this investment works out to be approximately $83.00 per square foot, which is an enormous discount compared to what competitors and large operators invested to enter the Michigan market. For example, SOL Global announced a $150MM acquisition of Michigan cultivation licenses for a 110,000 sq foot facility which translates roughly to $1364.00 per square foot.¹ Curaleaf Holdings, the largest cannabis operator by revenue, announced acquisitions in the midwest recently. One of the very specific acquisitions in the neighboring State of Ohio includes a 32,000 square foot facility to the tune of $20 MM.² These two sizable operators invested heavily into the region and State market because they realized what Grown Rogue realized that the Michigan market is primed for a major boom in Cannabis consumption.
Comparison Table of Recent Michigan Cultivation Investments
|Company||Size of Cultivation Acquisition in Sq. Ft.||Cost of Acquisition||Cost of Acquisition per Sq. Ft.|
|SOL Global||110,000 sq ft||$150MM||$1364.00|
|Curaleaf Holdings||32,000 sq ft||$20MM||$625.00|
|Grown Rogue||24,000 sq ft||
($2MM is paid back to Grown Rogue as a loan first)
Fortunately, our cost basis is a fraction of those other operators especially considering the vertical integration of our assets and the choice location that is Muskegon, MI.
STEP 2 – Execute with Experience
3 years ago, I made the comment that until this point in history, “…cannabis has never really been grown at scale”, except for a few localized rare instances. Obie Strickler, CEO and Co-Founder of Grown Rogue, agreed and remarked, “It is very difficult to grow premium cannabis at scale.” Obie Strickler knows because he likes to jokingly say that over his 15 year career, “I’ve grown more mold than most operators have finished flower.” While that’s hyperbole, it is entirely valid and factual to consider that there are indeed very few operators that have truly developed a cannabis cultivation pedigree – especially when considering large scale grows. Canada’s burgeoning cannabis business discovered this the hard way having lost of 10s of millions of dollars in crops due to pests, mold, and other very common challenges of cultivating cannabis at scale. In fact, Matthew Nordgren, CEO and Founder of the Arcadian Fund – one of a handful of US Funds with a Cannabis focus, says that more crop failures are imminent due to a lack of experience.³
In a more detailed story about the challenges of growing quality cannabis, Ian Brown explores the challenges even an academic with a seasoned team of experts runs into saying that…
“A plant as complicated as cannabis needs to be grown in a rigorously standardized environment. But the methods of organic and even large-scale commercial cannabis growers are still rife with variables and superstition.” ⁴
The bottom line is that acquiring real estate and building out a grow operation is only the beginning. It’s the experience that makes the difference between real yields of quality $3500+/lb cannabis and lost crops. Grown Rogue has over 75 years of that cultivation experience on team and these best practices have led to producing consistent high quality cannabis products: flower, pre-rolls, oils, and edibles that have earned accolades and consistent financial growth.
Image of 1 of 8 Grown Rogue Indoor Flower Rooms at the Medford, Oregon Headquarters
“The Oregon market has driven our innovation and focus on excellence,” Obie Strickler said in an interview in late 2018. Cannabis experts realize the Oregon market is highly competitive and those that survive are doing something right. Those that thrive, like Grown Rogue, are at another level. The evidence of thriving in the Oregon market and as a company is two-fold:
- Grown Rogue has achieved financial growth despite market conditions including price compression and tremendous over-supply.
- Grown Rogue has earned highest honors in cultivation best practices including a potential record breaking THC crop.
Applying the Grown Rogue success story to date into the Michigan market is an exciting proposition as current product offerings in Michigan pale in comparison to what Grown Rogue cultivation has honed over recent decades.
The savvy investor will carefully examine the track record and experience of the senior leadership of any mover in the new Michigan market. Grown Rogue’s expertise and rise in the most challenging of cannabis markets speaks volumes. The execution on cultivation leading to record potency and awards is a feature ingrained in the company’s DNA. Most operators that put together the funding to acquire choice assets in hot markets like Michigan are talented at fundraising and financial pro-formas, but lack any real experience in cultivation and operation. We feel this is a critical step in achieving a meaningful ROI from such an investment.
STEP 3 – Build a Brand
As you probably know, transporting cannabis across State lines is not permitted. In fact, the only aspect of the cannabis business you can transport across State lines is the intellectual property and brand the company has built or plans to build. Grown Rogue’s experience in Oregon and California is all about building a brand around community. Our tag line is “Enhance Experience.”
To us, building a brand means reaching the end user, the consumer. So, we put ourselves in their place asking what would we want to know when considering a cannabis product. How will this product affect me mentally, physically, and what are the ingredients? We provide all of this information on each of our packages so that the consumer can hear it directly from us – not a budtender or dispensary owner. This is our commitment to building a brand that truly enhances experience. Cannabis is a powerful plant that when consumed properly can positively impact most life experiences from enjoying a hike to alleviating pain to relieving social anxiety to meditation. Our brand and packaging provides the direction and information so the consumer gets the right answer to those questions. We believe this will build trust as the mainstream consumer begins to seriously consider cannabis for themselves and their family.
Image of the full suite of Grown Rogue products
The cannabis industry is a consumer packaged goods industry which for us means a constant analysis of who and why someone is buying our products. It’s common knowledge that the current largest buyer of cannabis products are men ages 21-34. But we believe that is changing rapidly based on growth in market adoption and new influencing players entering the market. It would not surprise us that within 5 years, the primary buyer of cannabis products are women 28 – 42 in age. To test our supposition, we’re constantly looking at data and research while conducting our own analysis. Here’s a sneak peak into our next wave of product packaging… notice a trend?
Image of next generation Grown Rogue Branded Products
As the market matures, brand equity will be critical to maintaining and growing a customer base. While we fully understand the nuances of a business to business model with our direct buyer being the dispensary, we put a tremendous amount of consideration in the consumer experience in everything we produce. That’s why early on, we invented the world’s first nitrogen sealed pre-rolls and recently we were awarded the patent. This is our one of our unique differentiating features we plan to bring to the exciting Michigan market.
STEP 4 – Be Unique
There’s nothing more frustrating than opening up your premium pre-roll to find that it’s not nearly as fresh as you remember it smelling in the store. The issue is that cannabis is notorious for losing freshness and quality once it’s exposed to oxygen. And, there’s really no way to package the cannabis without exposure to oxygen in some capacity. This is the problem that Obie Strickler solved with the patented nitrogen sealed pre-rolls which have now become a symbol of our unique approach to cannabis products. The patented process involves removing the oxygen and infusing nitrogen to ensure freshness and that oh so satisfying “pop” when opening your pre-roll.
Click the image below for a live demonstration
We’re applying the patented technology to other products in our suite. And, we’re already taking orders and calls from other operators wishing to license this unique approach to freshness. If you’re going to succeed in a crowded market, you have to be unique or you’ll get compressed on pricing. That’s why it’s so important to obtain patents for those game changing concepts like the nitrogen sealed pre-rolls. We seal our flower in much the same way.
STEP 5 – The Right Plan to achieve ROI
Even though the Grown Rogue team entered the Michigan market on such good terms, has an award-winning record and financial performance to execute, bestows a strong community brand built on experience, and holds unique assets like the patented nitrogen sealed pre-rolls, we still realize that the final step in success is a strategic plan. That’s exactly why we picked West Michigan instead of the Detroit area. We know our vertical operation is one of only a handful serving millions of consumers. We also recognize the location of Muskegon in the center of the popular coastline to be a constant source of activity in tourism and State Park/beach destinations.
The fact that we have built out indoor grows and have the experience is why our Muskegon partner chose us amongst several others to build a partnership. Even in a short few weeks, we found ways to modify the construction plan to maximize our cultivation and processing while cutting costs.
Image of actual Grown Rogue Michigan Cultivation/Processing Facility featuring 6 Grow Rooms
Our Muskegon licenses are all located on one large parcel. This allows us to develop a truly vertical integration model greatly controlling costs and providing consumers with a special buy+tour opportunity. Imagine seeing screens in the dispensary of how the cannabis is cultivated and processed and then taking a 30 second walk to the actual facility for a guided tour. It’s the future of cannabis brought to the midwest. As far as the economics, our cultivation facility will be completed (pending financing) by Q42019 allowing our first harvest in early 2020. At full capacity, the facility will produce 4000 lbs of quality cannabis and if you remember reading about pricing in Michigan being around $3500/lb, you know this means gross proceeds of about $14MM. Through decades of cultivation optimization, we’ve been able to reduce our cost of cultivation down to about $500/lb for high quality indoor. This translates into massively profitable operations and this doesn’t include the processing or retail dispensary economics.
The cannabis sector is tightening. Investors are carefully examining the difference between projections and performance. People are looking under the hood to see “what have you actually done,” and fancy terms like Multi-State Operators are being replaced with Strategic State Operators. Grown Rogue is delighted with the extra scrutiny, especially when it comes to the Michigan market and the economics around our acquisition and plans.
If you’re interested in learning more about Grown Rogue and potential future private placements to fuel our very strategic growth, please sign up at our investors page for updates or email us at email@example.com.