Dispensary Operations Amid COVID-19

Show Notes

Today we'll be discussing dispensary operations. Nic, could you start by providing a general overview of the cannabis retail environment?

• I don't know if any business was ready for the pandemic. It caught operators off guard. Cannabis retailers had to adjust radically to meet the demand of the pre-lockdown sales rush that many states experienced while changing their operations to meet the Centers for Disease Control and Prevention (CDC) recommendations. 
• As the lockdowns began, cannabis dispensaries in most states were deemed essential businesses. While we were grateful to keep our doors open, it required significant shifts in day-to-day operations to keep dispensary staff and customers safe, particularly at-risk populations such as immunocompromised medical cannabis patients. 
• Cannabis retailers were forced to adapt fast, create operating procedures, and implement new technology to execute curbside pickup, delivery, and in-store purchases successfully. 
• Pre-pandemic cannabis retail operations were solely focused on the in-store customer experience with large showrooms, budtenders educating customers, and tablets to view product offerings. Almost overnight, it went from this to how do we process upwards of 65% to 100% more retail transactions through alternative means that we've never used before. 
• Businesses that have successfully adapted to new service offerings and streamlined their operations over the last 4 - 6 months have captured significant market share. This land grab of market share by select retailers would not have happened in the past. 

What are some of the operational challenges that dispensaries are facing right now?

• Well, first of all, you never really know if you're going to get shut down by the federal government. While we haven't seen much of this and the industry's momentum is too large to fail, it's still always a risk until there are changes to federal laws. 
• You have to be alert and up to date with public health mandates to ensure that you remain in compliance. 
• Retailers have to navigate the challenges of local mandates, including mandatory face masks, plexiglass protection at sales stations, and six-foot social distancing. Dispensaries with wandering tablet POS systems had to establish new protocols for using these systems to comply with social distancing and cleanliness protocols. 
• Dispensaries were traditionally filled with touchpoints where customers and staff interacted with the same items throughout the day, from cannabis samples to tablet-based menus. All of these practices had to be replaced. 
• Recreational cannabis in Massachusetts is back online after being deemed non-essential during the first few months of the pandemic. With its adult-use program, Massachusetts was the only market in the Northeast with the ability to sell to non-medical patient adults from out of state. Operations were deemed non-essential and closed in fear that many people would travel to Massachusetts to purchase cannabis, putting locals at greater risk of COVID-19. This pause was a considerable challenge for operators, many of whom were struggling to make a profit in the market before halting their sales for months. Sales have since increased massively in Massachusetts. 
• The biggest challenge for dispensaries is to look ahead over the next 6 - 12 months and figure out the new consumer mindset and implement the required changes for seamless customer experiences. This includes easy and accurate online ordering, menu boards with up-to-the-minute inventory tracking, delivery (where legal), and touchless quick pick up solutions.

Are vending machines, delivery, and pick up services the new normal? Or, do you think we'll go back to business as usual post-pandemic?

• Everything's changed, normal as we knew it before is dead. Even if we develop a vaccine and the world can go back to some semblance of normal, there will be an underline fear ingrained into our life patterns for some time. This will influence consumer behavior and decision making. 
• I think the store to your door mentality will continue to be a priority in North America. Look at Amazon, it's convenient, it's easy. 
• Pre-pandemic, we would use GIS systems to select real estate with good access to parking, access to main thoroughfares with consistent traffic, areas with high disposable income, all the things you would consider for retail sales in the past. While this information is still essential, there is now an opportunity for delivery services that have access to certain areas to secure serious market share without prime retail real estate. 
• I think these solutions are here to stay and essential for businesses to weather the current storm. But on the other hand, there is tremendous opportunity to capture market share and build a loyal consumer base before patterns start to normalize again. 

What about the folks that want to apply for a cannabis dispensary license, has the pandemic changed how they will navigate the application process? Are there new priorities while developing a business plan today?

• The market has changed. You've got over 50 million unemployed people, a lot of disposable income has vanished, and individual businesses have failed.
• Municipalities that were heavily dependent on tourism (restaurants, hotels, bars, etc.) have seen significant decreases in tax revenue. We're starting to see cannabis legalization prioritized to restore much-needed tax revenues. There will be many more opportunities on the horizon for new licensing in the next few years. 
• Many companies that were acquiring licenses in multiple municipalities have paused as their capital sources have run dry. As they navigate the pandemic, they don't want to take on new retail leases, licensing fees, legal fees, and operating expenses in the short term. New entrants have the advantage of less competition for new licenses and discounted existing licensing available for purchase. 
• During the pandemic is a great time to secure new licenses as more municipalities will be opening up, and there is less competition. 
• We've also seen significant issues with the awarding of new licensing, particularly in Illinois, due to the pandemic. This has created a situation where social equity applicants are paying leases and other fees indefinitely as they wait for licenses to be awarded. Most will not weather 3-4 months of this, especially in a competitive market where successfully winning a license is far from guaranteed. We will likely see several lawsuits between applicants and the state as a result.
• Teams applying right now will need to remain agile as many parts of the license application process have strict timelines, but with government office closures and other delays, you have to plan to comply with the requirements in the law. Common items to be aware of include background checks, live scans, municipal documents, letters of good standing, and more. These challenges are compounded when you have multiple owners in different states that all need to meet requirements on a strict timeline. 
• In many markets, we've submitted applications and paid the associated fees and are waiting to see if our time-sensitive documents are still considered valid. Each municipal and state government can treat these items differently, so it's just a waiting game with an unknown timeline. 
• We will see significant licensing activity from November forward due to new municipal and state ballot measures. 
• Now is the time to start preparing for new markets by getting familiar with local zoning, identifying compliant real estate, assembling a qualified team, and drafting business plans. 
• We're also seeing licensing opportunities for adult use consumption lounges. These opportunities are not as relevant right now, but we will see these lounges securing market share in the cannabis sector in the long term. For those seeking these licenses, you have to invest early and hold until the time is ripe, but licenses attached to high-quality real estate are great investments long term. Just image clubs that offer bottle service, there are very lucrative markup opportunities for the right businesses in suitable locations. 

With all that said, which markets do you like for dispensaries right now? Which states do you prefer? And, which markets would you avoid?

• Some markets are more of a squeeze for operators right now. Particularly those serving medical patients in highly regulated markets like Iowa, Virginia, and Texas, for example. As a disabled veteran, I'm very grateful for the businesses that have served patients in these markets. I just hope they can stay in business in the short term until regulations allow more access. 
• Massachusetts 
• Massachusetts is a big up and coming market. The delivery licenses for social equity applicants are going to be fantastic. 
• Maine
• Adult-use sales will finally begin on October 9th, after years and years of dealing with Governor LePage.
• Even though the state's population is just over 1 million, it is "Vacationland" and will be excellent for tourist purchases.
• Nevada
• Nevada is currently getting crushed right now by the lack of tourism. Some businesses are adapting quickly and serving the local population. Sales will ramp back up in time, but there will be a lull for a while. 
• There will be some distressed investment opportunities in the state, depending on how long it takes to ramp up tourism. 
• California
• There are still many jurisdictions in California where it's still not legal to grow or sell adult-use cannabis. More and more municipalities will come online in search of tax revenue. 
• We'll likely see new municipalities open up in established states like Colorado, Oregon, and Washington. 
• Illinois
• Adult-use in Illinois will explode by the end of the year and into next year. 
• All neighboring states do not allow adult-use sales. Illinois will also have social use consumption lounges opening up. 
• Prices will be high at first due to limited supply and limited licensed businesses. 
• We will likely see the next round of dispensary licenses awarded in the next couple of months. 
• Arizona
• Arizona will be phenomenal for adult-use cannabis starting in 2021 if the vote goes through.
• Regardless of who is elected, I don't see major federal policy reforms for cannabis happening anytime soon in the United States. 
• Now is an excellent time to get a head start on your research and business planning for license application opportunities in new markets. Staying ahead of the local ordinances and zoning regulations as they develop is vital. Be strategic; where can you make a huge impact and get ahead? 
• Another option for companies looking to expand right now is to look for licensed operations looking for an exit. We've seen many companies operators that are a little burned out, and we're unable to raise the next round of capital that they needed to scale but have a valuable license in a great location. 

What sort of product mixes do you see right now? Assuming all product types are available in your state, what product types should retailers be carrying at this time?

• Each state has a little different data in terms of which products are the best sellers. Look at data from cannabis industry providers, like Headset, Baker, and Cannabis Benchmarks. You can get a more detailed look at what's selling during the pandemic and how consumer spending trends change. 
• We are seeing that basket sizes increase when consumers visit a store in person. 
• We've seen a surge in the edibles and beverages category. This is likely because producers are offering a more standardized and consistent experience for consumers. Remember, we're selling the experience, not just a brownie or gummy cube. 
• Vape sales have stayed relatively steady.
• Consistent topical CBD products are also starting to capture more market share.
• As cannabis products reach a broader demographic of consumers, it's essential to have standardized lower dose products to offer something for everyone. People are looking to cannabis products to relax amid the pandemic, and many of them are not consuming smokables. 

What inventory management challenges are dispensary and retail operators facing right now? What do operators need to consider to navigate the current challenges? How should they plan for the future?

• At the beginning of the pandemic, we saw significant supply chain disruptions specifically for PPE that inhibited some retailers' ability to open their doors. Face masks and hand sanitizer were not available. Plexiglass for dividers was tough to source, and prices were up around 400% compared to pre-COVID-19. 
• If a customer purchases a product that they like from your store and it's out of stock next time, you risk losing a customer. To reduce this risk, you'll need supply contracts in place for particular product lines and categories. This provides continuity for cultivators and manufacturers to maintain consistency as well. You may even want to pre-purchase top-selling products, similar to purchasing forwards or futures, to ensure consistent supply and negotiate prices.
• Pre-pandemic, we had client partners in specific markets paying $10k - $20k per month for premium shelf space in a dispensary, just like brands do in grocery stores. Now that curbside pickup and delivery are becoming the standard, it's time for brands to assess whether or not it's worth the expense for shelf space that few if any customers are seeing. 
• Online marketing and community development are more critical than before now that customers are researching and shopping for cannabis products online. 
• While product quality and consistency are key, the price point has become much more critical. During this economic downturn, very few customers will pay exponentially more for a product because it is "craft cannabis" or a premium celebrity-endorsed brand. 
• Right now, cultivators, manufacturers, and retailers need to prioritize volume over margin. If you can regularly deliver high-quality products at a reasonable price during this time, you're going to develop customer loyalty for life. 
• Dispensaries need to focus on digital marketing strategies, guarantee that particular product lines are consistently available, and have lower price point options. 

Has COVID-19 created any staffing issues for cannabis dispensaries? How should dispensaries prepare for staffing their operations in the months ahead?

• Saw a lot of staffing issues for in-person operations at first. Some people had to stay home and take care of their families, and others were sick themselves.
• Business executives need to be more patient, humble, and compassionate with your staff than you could imagine. These are stressful times, and everyone has their challenges right now. People are worried about their jobs and about taking care of their family's basic needs. You've got to make sure that your staff members have a stable base. 
• There are currently over 50 million unemployed people in the United States. There is a lot of new talent out there. Now is an excellent time to seek out new talent to manage operations.
• Adopting better inventory management and POS systems alongside streamlined online ordering and fulfillment services is valuable right now. A greater focus on online marketing and branding is also essential for dispensaries. 
• I've seen operations running with a third or half of their previous staff and doing the same amount of revenue because the time with each customer has declined. That product research is now happening online, so be sure to invest where the attention is. 
• Take care of your current staff. Do an in-depth assessment to see which staff perform and seek out some new talent if needed to build your team. 

With the pandemic's effects likely to impact our world for the next two or three years, what do cannabis retailers and dispensaries need to do to compete and thrive over the next few years?

• Sharpen your knives and tighten your belts. 
• Now is the time, more than ever, to make a stand. This is likely one of the most critical times in your company's existence. 
• Consumer mindsets, government policies, shopping patterns are changing; everything is changing. If you don't change with it, you are static, you're dead. You need to be dynamic, fluid, and adaptable. 
• I've seen dispensaries near universities in states like Pennsylvania have a significant increase in sales as students have come back. Businesses have staffed up quickly to meet demand. Yet the universities could close again next week, causing sales to plummet again. 
• Even if we discover a cure or vaccine tomorrow, the habit patterns developed through fear will remain. It's changed how we live our life, how we travel, how we do everything. It will take years to normalize again. 
• Stories from how businesses navigated these times will forever shape the future landscape. How did we produce? How did we take care of our workers? How did we get our supplies? How have legalization efforts changed?
• Companies that can evolve, stay fluid, and remain flexible will survive and capture market share for the future. 
• Now more than ever, many of the leading single state operators may find that their competitors are great potential partners. Joining forces may provide the resources necessary to thrive during this time and beyond.

Resources Mentioned

• Headset
• Blackbird
• Cannabis Benchmarks
• Hemp Benchmarks