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L-to-R: David Kretzmann, Joe Caltabiano, Charlie Bachtell
Run time – 13:13 (Transcript below)
Published 10/10/2018
Transcript
David Kretzmann: David Kretzmann here in downtown Chicago with Joe Caltabiano and Charlie Bachtell, the co-founders, and president and CEO, respectively, of Cresco Labs, a private, for now, cannabis company based in the US. So, guys, thanks so much for taking the time, and I think we can just dive right into it. Can you give us a background of what Cresco Labs is, and how the company was founded?
Charlie B.: Sure, Dave, thanks for meeting with us today. Cresco Labs, US cannabis operator, formed in Illinois but now operating in six states, really with the mission of normalizing and professionalizing cannabis. That’s the opportunity that we saw with our backgrounds in highly regulated industries prior to getting into this space, mortgage banking in particular, on the legal operations side and sales side, it really helped us identify the way that we would approach another industry that was going from unregulated to hyper regulated in a very quick period of time, and that’s what we saw with cannabis.
David Kretzmann: And what’s been your process to distinguish the company from other cannabis competitors? Like, what sets Cresco Labs apart from other operators here in the US?
Joe Caltabiano: So, you know, we look at this industry as an opportunity to instill some of the fundamentals from other industries, so not looking at it as a new industry, but taking pieces from the alcohol, tobacco, food, pharmaceutical industry, and applying a lot of those basic principles to the cannabis space.
We’ve focused on brand development. We’ve focused on the wholesale manufacturing, distribution, and logistics side of this industry, more than on the retail side. Our primary focus is to develop brands that are going to resonate with consumers depending on what their different need states are, and what type of products that they’re really looking for. We want to be able to talk to those consumers in ways that they want to be spoken to.
David Kretzmann: And what are some of the products that you sell? And maybe give us a breakdown of what products you sell, what are the top sellers now, and just what your process of developing brands for those products looks like.
Charlie B.: Sure, so, you know, based on the fact that we started the company in a highly regulated, compliance focused market, where you really had to develop everything internally, we’ve got a very broad product suite that covers all of the, you know, most familiar forms of cannabis, from raw flower, to concentrates, to vape pens, to edibles, and pills, patches, everything in between.
And as far as brand formation, we put a big effort on identifying market segments, and creating brands that spoke most directly to the participants in each one of those market segments. And so, we have brands that are geared towards the traditional cannabis consumer, we have a brand that is solely focused on the nontraditional cannabis customer, who maybe has never tried cannabis before in their life, but their physician told them it will help with the nausea from chemotherapy. So, they’re looking for more of a alternative to traditional medicine in brand and form.
And then all the way down through edibles, you know, developing an edibles brand that’s focused on absolute consistency in dosing and flavor. That’s how we think about brand formation, and speaking to the specific consumers.
Joe Caltabiano: And to drive into those brands a little bit more, our Cresco Brand, unlike other competitors of ours, the Cresco brand carries products, again, as Charlie mentioned, in the raw flower form, but it also has vapes, and concentrates, and some of those things. The Cresco brand represents about 55% of our overall revenue.
We developed that brand to look and feel on the shelves of Whole Foods. It was designed to speak to the consumer that already had cannabis, maybe, as part of their life, or was familiar with the product. We broke it down a little bit further, and rather than talking about indica, sativa, or hybrid, we introduce rise, rest, and refresh. So, making that much more approachable, much like walking into a wine store and somebody hearing about tannins for the first time. It was not a very approachable way to look at cannabis, talking about indica and sativa. So, introducing need states and some of those things.
Our Remedy line, same type of thing. Remedy is the brand that was developed for that patient who was speaking with their oncologist, and going through chemo, and wanted to try cannabis but certainly didn’t want to smoke something. So, the Remedy brand is more of a non combustible product line. That’s where the pills, and patches, and salves, and sprays, and tinctures live, and that form is a much more traditional form of medicine, again, with THC or other cannabinoids, and really focusing on ratios, you know, a one to one CBD to THC ratio.
Our Reserve brand was developed to elevate the consumer’s experience. It’s a premium product, it probably represents 10 to 15% of our revenue. But that Reserve brand is an artisanal brand, there’s more time spent on cure, there’s much more focus on the trim side of it, everything is hand trimmed, the packaging is an elevated experience. So, looking at a brand, much like when somebody goes to buy a bottle of bourbon in the holiday season, they might elevate from what their normal, regular purchase is. We didn’t want to lose that customer after developing a trusted brand with them, we wanted to elevate that experience, and that’s what the Reserve by Cresco Labs, or Reserve by Cresco is.
And then the last brands that we developed were with the James Beard Award winning Pastry Chef Mindy Segal, so the brand is Mindy’s Artisanal Edibles and Mindy’s Kitchen. Mindy’s Artisanal Edibles is a decadent, chocolate, forward, indulgent edible line that is fantastic for someone who might be looking to bring something to a party instead of a bottle of wine. So, it’s designed to resonate with the consumers looking for that elevated experience. But then what we also didn’t want to neglect was the CPG, and the consumer packaged goods, side of the edibles, which is fun, forward, a lower price point, and that’s where that Mindy’s Kitchen line came from.
David Kretzmann: So, talking with you all today, Cresco is seeing a lot of success in its, I guess, for lack of a better word, core markets, where you’re market share leader here in Illinois, Ohio, Pennsylvania. In the earlier stages of expanding into new states, what are your expansion priorities for the company over the next three to five years?
Joe Caltabiano: So, we look at regulated markets. We enter markets where there’s a high barrier to entry driven by regulation, and we look at markets that are complementary to our existing brand footprint, so markets like New York and Florida. We added markets recently, Arizona, California, and Nevada, all for various reasons.
You know, looking at a market like Nevada, where 40 million people go to Las Vegas on an annual basis to have a better time than where they came from. So, getting your brands in front of customers like that is something that we were really focused on, was pushing the brands out there.
California’s the largest cannabis market in the world. We wanted to be a part of that as regulation came in, that market looks very different today than it did three years ago. So, looking at markets that, again, our focus on regulation, that’s a big thing for us.
We’ll look at a lot of M and A activity over the next few years, but we’ll also … we’re applying in states like New Jersey, currently, we’ll have applications submitted there, Florida, ultimately, when they reopen their application process. And looking at other licensed application states as well as M and A activities in other markets that are already established.
David Kretzmann: And I’d be curious to get your approach to capital allocation. The company is, for now, still a private business, but obviously, in the US, on the federal level, cannabis is still a schedule one drug, so I imagine … I don’t know if that is nerve wracking at all, not really knowing what, you know, Attorney General Jeff Sessions will do, but what’s that process been of being a private company, raising money, and what’s your approach to allocating that capital as you look at different expansion opportunities?
Charlie B.: You know, so, for the allocation of capital it really is identifying those strategic markets, so a certain percentage of capital definitely is allocated towards the M and A activity, and the acquisition of the piece of paper that allows you to conduct business in those states.
And then, you know, the rest of it is really building out the … not the rest of it, but a good portion of it is building out the infrastructure to make sure that we can successfully scale this company and create that national footprint that we set out to create. So, a lot of that goes into traditional business components, legal, and HR, and compliance, and government affairs work. This clearly is a … it’s a political issue, so, you know, a good amount of that is spent on making sure that we have good relationships and good regulations in the states in which we operate.
Joe Caltabiano: And we’ve been fortunate, we’ve raised over $100 million in the space thus far, privately funded, through networks and family offices, and we’re now just starting to get some institutional money coming in to the business, and to the industry as a whole, so that’s exciting as well.
David Kretzmann: With the US market in particular, right now each state is really siloed, so you have a bunch of fragmented markets in the US, where you can’t really export product from one state to the other. What do you think the US market looks like three to five years from now? Will it be easier to export product, or export brands? Like, what do you have on the horizon when you think of where the US might look like three to five years from now?
Joe Caltabiano: That’s a super tough question, Dave.
Charlie B.: [crosstalk 00:09:59]
David Kretzmann: An unfair question, but-
Charlie B.: Pull out the crystal ball.
David Kretzmann: Sorry about that.
Joe Caltabiano: Yeah, if I knew that … No, you know, the markets are certainly going to evolve. We view it as we’re in, maybe, the second inning of a nine inning baseball game, and the order of which things happen, you know, is anybody’s guess, but certainly there’s going to be some changes on the federal level, there will be additional states that come online, there will be more access to banking.
As far as interstate commerce, I think that’s one of the last pieces of the puzzle. I’d put that in the eighth, ninth inning of this game. I think you’re going to see health insurance come into play before you see those interstate commerce.
States like Colorado have built an industry based not only on the tax revenue that’s generated that, you know, gets a lot of media attention, but the amount of jobs that are in these markets that are getting created, or the construction that is being created because of the cannabis industry, that would be hard to see. It would somewhat create a vacuum if there was only one spot in the country that was exporting all the cannabis because it was a slightly lower price per gram.
So, I think it will take some time before interstate commerce really begins to occur, but again, I think it’s anybody’s guess where it goes.
David Kretzmann: Now we’re just about out of time, so wrap up with a final question here. At the Motley Fool we’re a community of investors helping fellow investors, and if and when Cresco goes public, what are the metrics that investors should be following over the next five years to gauge the underlying health or progress of the business? What are the go to metrics that you look at to gauge that long term trajectory, or success of the company?
Charlie B.: Revenue and IBDA. I think it’s pretty traditional in the way that potential investors should be evaluating vehicles that they’re looking to invest in. And know the management team, have they been able to establish a successful operation to date? Are they generating revenue? Are they IBDA positive?
You know, all of the traditional business metrics and financial metrics that maybe haven’t existed in this space yet are all going to be very relevant over the next, honestly, six, 12, 18 months. That’s going to be the way that these companies are evaluated going forward.
Joe Caltabiano: And also, I think, people who can do it in multiple states, you know? If you look at the industries that came before us, being able to operate in one state is one thing, but being a national player, where you have operations in multiple states and continue to excel.
So, seeing who’s the real market leaders, who’s in the newspapers, who was the first to market in those states that have really put these different programs on their back and pushed the ball forward, I think, is critically important. It really differentiates the people who are going to make it long term, and be there in the three to five years from now.
Charlie B.: Market penetration and market share.
David Kretzmann: Yeah. Well, I think that’s a great note to leave it at, for now, but certainly Marijuana Mavericks will be following the story closely in the quarters and years to come, so I look forward to keeping the conversation going, but for now we’ll leave it at that, with Joe Caltabiano and Charlie Bachtell, the co-founders of Cresco Labs. Thanks so much for taking the time and inviting us into your Cresco Labs HQ here in Chicago.
Joe Caltabiano: Thanks, David.
Charlie B.: Thank you, David.
Joe Caltabiano: Appreciate it.