Diversification of revenue streams and non-correlated assets is beneficial in business. Diversification is even more critical in industries dealing with massive pricing volatility, political unknowns (both positive and negative), and independent markets state by state. Forecasting in cannabis is less about hitting a specific target (bullseye) and more about moving in an actual direction: N, E, S, W.
Imagine you have a compass where all you know is the direction of a significant point. That’s how most operators assume current headwinds.
Building a stable business that isn’t subject to these massive unknowns can be worrisome for operators and investors. One option for these cannabis companies seeking stability is to diversify outside of traditional cannabis.
How far outside traditional cannabis should they diversify, and what is most beneficial for business stability? Well, that depends on your team’s business and, most importantly, your team’s core competencies. A diversification strategy gaining adoption is migrating parts of cannabis companies into traditional agriculture products.
Aurora, one of the original sizable Canadian LPs, is more known for burning cash, but they have now taken this approach to further improve business.
According to MJBIZDaily, “Aurora Cannabis buys profitable vegetable firm for CA$45M, sells Sky greenhouse.”The most telling quote: “The ability to get access to cash flow today is going to be really important for a competitive position going forward to be sustainable long-term,” Squires told MJBizDaily in an interview.
Glass House Farms is another example of a company adapting its business for outside revenue streams. Their website shows Glass House Farm’s total operating greenhouse space to be more than 500,000 square feet—or almost ten football fields.
This “unicorn greenhouse” is a perfect example of economies of scale.
A greenhouse of this magnitude could potentially serve the entire California cannabis market.
Graham Farrar, President of Glass House Farms, was on our podcast, The Dime, where he shared how they are using the greenhouse to diversify today.
Glass House Farms operates as the landlord. The greenhouse has a sublease where another company grows tomatoes and cucumbers. Glass House brings in revenue from operations outside of cannabis and keeps the asset to provide less variability in its efforts.
Operating in the cannabis industry is expensive, and it is slow to open new markets. While NY continues to struggle to open its market, NJ also had delays that caused capital constraints; ask Jason Wild, Chairman of Terrascend. His team had sunk enormous capital in the NJ market years before the market turned on. These capital investments are costly for companies, shareholders, and all parties involved. With access to capital being expensive and challenging to come by, the decision to invest years ahead of the market opening is restrictive for other operational activities.
Even more challenging for cannabis operators is the risk of the unknown future. Wholesale prices are fluctuating and trending the wrong way. Safe Banking, which many had hoped to get active, could finally potentially provide an influx of investment capital into public markets but has been meddling in nowhere land. Will you wake up and realize that gas stations can sell medical cannabis in 2022?
These unknowns are what separate cannabis from traditional industries and cause those involved to operate with completely unknown variables. Right now, a majority of the cannabis industry is trying to survive. Their cash flow is their oxygen. Cannabis companies need diversification to ensure the safety of their businesses, both short- and long-term.
These types of adjustments in thought allow companies to bring in stable revenue outside of cannabis is exceptionally beneficial.
Subleasing out part of their facility also gives them the flexibility to scale over time. If and when demand and need to grow other cannabis continues, Glass House can adjust their facility, not renew their lease with their tenant and scale their grow room.
Smart operators will be prudent with shareholder capital and a diversified revenue stream with the stability to navigate the complete unknown.
“Risk diversification matters not just as a defensive measure, but it also maximizes returns because we expose ourselves to all the opportunities out there.” —Peter Bernstein
Diversifying your business is always the best move.
A positive cash-flowing business is a lifeline for a company burning cash every month. Will Aurora fully pivot their business? Unlikely. But in the short term, this is about staying afloat and, more importantly, surviving.
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