Photo: Richard T/Unsplash
Cannabis Benchmarks started seeing price improvement in legacy markets during “Croptober” last year. Volatility drained from the outdoor flower market first, helping to steady greenhouse and indoor product prices. The bid under the outdoor market was noted in California, Colorado, and Oregon. Meanwhile, prices in new markets with mostly indoor-grown crops have been undergoing an epic shellacking.
To help sort out the current market environment, Cannabis Benchmarks spoke with Andrew Thut, pictured at left. Thut is Chief Investment Officer of 4Front Ventures Corporation, a multi-state operator (MSO) with vertically integrated operations in California, Washington State, Illinois, Michigan, and Massachusetts. Thut’s background is in finance at BlackRock, MFS Investment Management, and BT Alex Brown as a small cap growth analyst and portfolio manager. He brings a unique skill set to the cannabis industry, with an understanding of capital formation, financing, and business management.
4Front has brought 20 cannabis brands and 1,800 products to market through its Mission dispensaries and retail stores in its core markets. They have a 170,000 square foot, fully automated manufacturing facility in Commerce, California, where they can kick out 100,000 edibles, 12,000 pre-rolls, and 9,000 vape cartridges per shift. Their 558,000 square foot Matteson, Illinois facility will house cultivation and production capabilities. Further expansions are underway in Illinois and other states. In short, the company is on the move.
Thut described the current market as one where “capital sources are emboldened” with companies under stress and interest rates up. He added, “if you’re not cash flow positive, you’re dead in the water” – or shut out of financing, in other words. Indeed, Thut sees the key to building the cannabis industry as the ability to finance through traditional sources – banks, namely – and laments the failure to pass the SAFE Banking Act. He thinks Senators Charles Schumer and Cory Booker, who last year declined to put SAFE up for a vote in favor of their own ill-fated legalization bill, “have no idea how capital is formed.”
Thut said SAFE “would be an “acknowledgement cannabis is a legal market … or at least somewhat legal.” Asked about financing rates in a post-SAFE environment, Thut said rates would be sharply lower through the traditional banking system, compared to the financing offered by lenders currently operating in the industry. Thut expressed the same frustration other firms have, saying, “we have a company we built legally, but we don’t have access to the banking industry.”
On the state level, Thut sees Illinois as 4Front’s “single biggest growth opportunity,” with “45,000 feet of canopy opening next month.” Thut puts the cost of production “below $500 per pound” in the state, well below the spot wholesale flower price Cannabis Benchmarks assessed as of the final week of February 2023.
He said the MSOs operating in the state have “done a good job in controlling the market.” Thut pointed out there are “120 dispensaries for 13 million people,” but “the bigger story is the release of 180 social equity [retail] licenses.” He sees expenses for new licensees running about $1.5 million – ”$750,000 for retail and $750,000 for working capital.” He observed there’s very little money to help social equity licensees build out their businesses, but the licensees are allowed “to modify or sell their licenses,” an opportunity for 4Front in a wealthy, high demand state. Thut also noted the state allows a single entity to hold up to 10 retail licenses and expects 4Front to obtain eight more licenses to max out retail distribution.
4Front has a large presence in California, including hoop houses utilizing mixed light cultivation to achieve low production costs. In fact, Thut said, “driving down the price of production is our whole M.O.” He elaborated, “the elasticity of low production costs – assuming one creates a good product – can result in more market share.” While he noted 4Front is not “cash-flowing” in the state, he pointed to the recent rebound in wholesale flower prices. Indeed, Thut said, “Croptober never really happened,” and “a huge number of licenses have left the California market.” Asked about the specter of interstate trade, Thut replied, “we didn’t build on the premise of interstate commerce, but we can churn out 20,000 boxes of gummies per shift.” That said, Thut sees increased enforcement against illicit operators as more helpful to the legal industry than interstate trade.
Regarding Massachusetts, Thut said “it’s not enough to be a low cost producer” and 4Front’s aim is produce “weed for the masses at a great price.” He’s seeing a turn in the Massachusetts market where companies “can’t move bad weed at any price,” suggesting the market at one point was easily absorbing lower quality cannabis. “It’s a winner take all market,” Thut concluded.
4Front has three grow facilities, one recently purchased, as well as three retail outlets in Massachusetts. Thut said the most recent purchase was from a family looking to monetize their investment and they’ve stayed on to help 4Front; “they’ve been great.” Their Georgetown, Massachusetts retail store is generating $2 million per month. The firm saw massive growth in the state in 2022, increasing market share by nearly 40% while simultaneously increasing wholesale customer count by over 70% between Q2 and Q3 last year. Thut expects continued growth in the Bay State.
Finally, Thut likes Washington State because inexpensive energy prices lower his cost of production. He said there’s virtually no illicit market in the state because prices are so low, citing $0.55 per gram and $300 per pound production prices.
In discussing new opportunities, Thut likes the New Jersey market, with the state having recently lifted caps on cultivation licenses. However, he pointed out that the state is “open to interstate commerce,” referring to proposed legislation that would allow New Jersey’s governor to authorize interstate trade under certain circumstances. Thut continued, ”but if the pricing comes down …” and trailed off, suggesting his firm might take a look at entering at a later date.
On the other hand, “If you gave me a New York license, I don’t think I’d take it,” Thut declared. He sees a burgeoning illicit market since legalization in the Empire State, along with a chaotic legal market that has yet to issue licenses widely.
4Front manufactures pre-rolls, gummies, and vapes and “longer term, [we] don’t want to be a farm.” Thut believes when “big ag moves in – they’re more efficient,” suggesting if and when big ag begins producing cannabis at scale 4Front will be focused on manufacturing and retailing. Asked about product trends, he said, “flower has never given up a big share [of the market], flower has held steady,” even as vapes, gummies, and other products have proliferated.
Thut’s financial background is a huge plus in the cannabis business. His determination to “wring out labor wherever you can” and drive production prices lower is the formula for success in any manufacturing sector, including the cannabis industry. Thut is a sign of the professionalization of cannabis enterprise, bringing to 4Front a skill set trained to see the industry as an agricultural, manufacturing, and retail business, where analysis, planning, timing, and execution are front and center.
In Part 1 of our MSO Spotlight Series, we spoke with Jushi Holdings to understand their data-driven efforts to achieve scalability in the markets they operate in.