Will MedMen be the First Main Marijuana Firm to go Bankrupt?
Wait, you possibly can’t be speaking in regards to the MedMen that’s publicly traded and has a market cap of over $2 billion, proper?
Sure, these guys.
For those who haven’t been following the current line of credit score issued to Medmen, Alex Berenson wrote a terrific piece overlaying it for CNBC right here. Among the challenges going through the corporate primarily based on their burn fee, asset gross sales, and total competitors from authorized and black-market suppliers, most notably in California, may spell hassle for the corporate. Berenson, experiences on the “bank card like deal”, as I’ll name it, that Medmen made with Gotham Inexperienced companions. Among the highlights, lowlights in case you are a shareholder, embrace the next:
- Monetary statements in February confirmed Medmen risked operating out of cash in lower than 100 days if they didn’t discover a credit score line or extra funding.
- The headline mentioned MedMen raised $250 million, when in actuality it was $100 million and it may go to $250 million if an entire bunch of milestones and targets are reached relating to the inventory worth, income, and so forth.
- The time period of the re-payment is “bank card like when carrying curiosity”. MedMen should repay the credit score facility at 6% over LIBOR charges and challenge warrants. As of writing this text the LIBOR fee was 2.79%, whereas the US Ten-Yr Notice Yield has dropped dramatically this week to 2.41%. MedMen can defer the curiosity in Yr 1 and have it roll over into the word. Sound acquainted? Bank card firms use the same mannequin when pitching you to “deliver your stability over to us and repay your different playing cards”. MedMen is taking a look at a really giant quantity to pay again in some unspecified time in the future at eight.5% curiosity or above? That’s not even stepping into the warrants and inventory dilution that may very well be a part of the deal.
- Berenson factors out that MedMen has already began to promote belongings and actual property to cowl it’s mounting money issues, however this creates one other downside. MedMen is not within the landlord enterprise of proudly owning the property and buildings, however is now paying lease on those self same properties and buildings.
- In its most up-to-date monetary filings from February of this 12 months, Medmen states “At our present working stage, we won’t have enough funds generated from operations to cowl our short-term and long-term operational wants.” (This was earlier than the Gotham Companions line of credit score deal.)
- MedMen can also be going through a contentious lawsuit introduced by its former CFO, James Parker. Parker’s lawsuit couldn’t solely be probably embarrassing but additionally catch the eyes of regulators as he alleges disregard for hashish legislation, rules, and authorized procedures.
If you’re within the hashish business you might be nicely conscious of the MedMed status amongst growers, suppliers, and former workers. Adam Bierman, the CEO of MedMen, has gone on report apologizing for a few of his early antics and his remedy of individuals within the hashish area, and claims issues have modified as MedMed has gone public.
An abrasive CEO is one factor, however what the place the largest errors in MedMen’s early plans? MedMen created excessive finish branding round hashish shops, desirous to be the “Apple Retailer of Dispensaries”. That was downside primary, constructing your model round a bodily retailer. Branding works for merchandise, not for 30×30 foot buildings. Ultimately, the buyer desires to get top quality hashish at an inexpensive worth, that holds true all over the place. The black-market costs are nonetheless 60% of authorized hashish costs in California if you consider taxes. BDS analytics estimates that 80% of California hashish gross sales are nonetheless accomplished on the black market.
Whereas most within the business imagine branding is the longer term key to success within the hashish business, particularly as hashish turns into a commodity around the globe when legal guidelines change, getting cheaper leads and orders may even be key. As soon as the Federal legislation modifications and 30 extra nations legalize hashish, the provision will likely be overwhelming. Most states help you even develop a specific amount of hashish vegetation in your personal home, not to mention have authorized dispensaries in your space. With CVS, Walgreens, and Walmart all leaping into the CBD race this week, it’ll solely be a matter of time, and Federal legislation change, till they’re additionally promoting the upper THC variations of hashish, generally often known as marijuana.
That is all dangerous information for stand-alone dispensary storefronts. As Prince mentioned in 2005, “The Web is useless” and bought laughed at, you can even say right now, “The stand-alone dispensary mannequin is useless”. You’re going to get laughed at however watch what occurs inside 36 months within the US.
Branding will likely be a key to distinguish your hashish flower or product from one other model’s product on the shop shelf. The highest-level hashish celebrities will win out at first, so your Snoop model, your Martha Stewart model, your simply introduced Seth Rogen model, your Willie Nelson model, and your Tommy Chong model. Superstar endorsement will likely be enormous to begin, since they have already got a powerful “know, like, or belief” with followers and customers.
Why do you assume Bruce Linton, the CEO of Cover Progress, has teamed up with Seth Rogen, Martha Stewart, and Chelsea Handler (by way of Cover Rivers funding in Civilized)? Bruce is enjoying chess whereas the others are enjoying checkers. He has an expert relationship with Snoop as nicely. When hashish goes the way in which of sugar, soybeans, and low, guess who’s locking up all the enduring manufacturers now? If branding is the important thing to the longer term (and I’ve debated this with Bruce saying web visitors would be the key to the longer term hashish order, not simply branding), guess who has all of the well-known manufacturers below his umbrella to advertise and lift shopper curiosity and consciousness.
The deadly mistake in Medmen’s plan is to model a retailer as your buyer expertise, and never the precise product. Like most of you on the market, I reside inside driving distance of some supermarkets. There may be the costly one which has nicer produce, natural stuff, and exhausting to seek out objects. There may be the middle-range retailer, that’s good inside and had cheap costs for on a regular basis residing. Then there’s the cheaper retailer with the outdated inside and possibly not the most effective contemporary cuts of meat, however you possibly can load up on the boxed and sealed objects there.
Apply that analogy to the dispensary mannequin, however solely the cheaper retailer isn’t a bit of bit cheaper, however 40% to 60% cheaper. The mid-range retailer for on a regular basis residing has a pleasant choice, an inexpensive worth for the comfort, and is on the way in which dwelling or works in your every day life travels. Then there’s the high-end retailer, the one you go into for “only a few objects” or “I simply purchase this or that there, however I can’t do an entire store there as a result of it will be technique to costly”.
You may see the issue with the Apple retailer, branding-model MedMed went all in on. Customers are worth delicate as it’s however throw in an enormous black market in addition to a “regular” dispensary as your competitors, and the buyer could are available for one merchandise or one thing particular, however they gained’t be doing their complete store there.
Time will inform if MedMen can get their spending and money burn below management and pull out of a debt spiral. Proudly owning a dispensary is a dream for many individuals, till your neighborhood CVS, Walgreens, and Walmart begin promoting the male hashish plant in several varieties now, and are simply ready for a legislation change to additionally promote the upper THC feminine hashish plant. The dispensary mannequin was protected by an “irrational moat” as Warren Buffett would name it, as a result of authorized standing of the hashish plant. As soon as that authorized standing is modified, the dispensary moat dries up.