Just last summer, two of my favorite entrepreneur pals and I drove up to a nondescript warehouse on Little Morongo Road in Desert Hot Springs and parked in the dirt next to a couple of construction trailers. We were greeted by a couple of hard hats on a golf cart and introduced to Stephen Boyd, founder and CEO of Growpacker. For the next two hours, Boyd spoke nonstop about his vision for the Amazon of cannabis while he showed us around the unfinished two-story concrete and steel building.
Truth be told, while I was thrilled at the prospect, I was having a tough time envisioning the processing, bottling, labeling, packaging, paletting, and delivery of finished goods coming out of the empty four walls. Fast-forward six months, and here we are: Growpacker is one of the most sought-after end-to-end manufacturing and co-packing facilities in Southern California, bringing new products to market exponentially faster, cheaper, and better.
As a seasoned tech entrepreneur, Boyd credits the accomplishments of his startup to a great team; a deep understanding of the market; a clear vision of the opportunity; and a heads-down, 20-hours-per-day, “let’s get this done” team attitude that has obviously worked. Growpacker now formulates, manufactures, and distributes products for industry-leading brands in a state-of-art facility and is in the midst of a multimillion-dollar Series A fundraising effort.
I caught up with Boyd recently to talk about supply chain, sustainable business models, and MedMen.
How big is your facility?
Twenty-eight thousand square feet up and running, with another 12,000 on its way.
Why did you choose Desert Hot Springs?
Let’s put this into a little context with a brief history of the industry. A lot of brands went from quote-unquote, being vertically integrated to realizing that getting licensing and zoning wasn’t as easy as they thought it would be—which is the reason why I knew the co-packing model would be great. So look at what’s happened; many brands have lost their licenses, so they’ve had to find partners or relationships in the industry to make their products, and moving from an illegal market into the legal markets means they’re now getting hit with astronomical tax rates. So, now you have to play the tax-rate game as strategically as possible.
Currently, at the grow level, cultivators are kind of doing this pricing “collusion”—trying to keep the price of the flower up to avoid cratering their own markets. At the retail level, all the excise taxes are being passed directly onto the customer, and the retailers know their advantage. I mean they know there’s only so many outlets to legally get cannabis products into consumer’s hands. They then create a huge downward pressure on wholesale pricing.
This results in a huge squeezing in the middle, where you’re feeling the biggest pain. So, depending on what zone you’re in, the manufacturing tax rate could be 10 percent, like in LA or Long Beach, which is a massive increase on cost of goods sold. Because of that, a lot of brands are forced to move to areas that have lower tax rates, and Desert Hot Springs was smart and early enough to offer a 0 percent tax rate.
Do you think the 0 percent tax incentive is a sustainable model for the city?
It’s actually very sustainable because distribution is where they’re going to make their money. And cultivation is where they’re going to make their money. Indoor grow may be expensive because of electricity, etc., but indoor in Long Beach or in LA is a lot more expensive because of property costs, taxes, labor, and parking spots.
Here’s the reality; the industry is being bottlenecked by parking because, to get a permit, you have to have so many parking spots per thousand square feet or for the capacity of your building, which drives up startup costs. Cultivating near the cities results in higher costs, so choosing the desert to cultivate is a financially smart move, and that’s again where the city makes money.
Overall, I think it’s a transitioning of the industry and a purge and churn of different brands, companies, and concepts. As they mature, they start to realize the strategic benefits of being elsewhere. And, by and large, that elsewhere has become the desert.
You mention purge and churn. What are your thoughts on the state of the industry?
I think where the purge and churn really comes from is archaic business models. I’ve never heard the term ‘vertically integrated’ more times in my life. And when brands we’re considering partnering with say ‘we’re vertically integrated,’ to me, that’s a red flag.
Most businesses are not vertically integrated. They operate; they stay in their lane; they become very efficient and effective at what they do—and that allows them to be unique. Take Growpacker, for example. We know our lane: we are high-speed manufacturers. We will not have our own brands; all we do is crank out products and materials at the lowest cost through innovation, the introduction of new machinery, new methodologies [while] continuously streamlining the process and pricing. That’s our business model.
I mean, I sat down with Adam [Bierman, ex-CEO of MedMen], and we kind of hashed through their entire business model, and I said manufacturing is gonna run the market, and he said, absolutely not; retail is going to run the market.
I think MedMen was set up to fail from the beginning because they’re looking at this as if people want to go in and have an experience. What we see time and time again is people purchase products, not necessarily an experience. What we see time and time again is there is absolutely zero brand loyalty. And what we see time and time again is price. People try something for the first time, and maybe they like it, maybe they don’t. But in this business, they always want to try something new. And, sooner or later, it comes down to price. It’s the No. 1 thing that drives everything in this industry: price point.
So they built these stores, these high-end stores like Apple. But they’re offering products that a block down are going for 10 to 20 percent lower. A block down, they don’t have nearly the overhead. Ultimately, the price point will drop, and that’s what we already see in the market. And, hence, why they’re not able to drive the revenues they were expecting because the margins are not there in the volume they expected them.
Plus their well-publicized mismanagement cues?
Yeah, they had some mismanagement cues (like pre-profit Ferrari’s, multimillion-dollar mansions, self-anointed $4 million bonuses), and the overall capital crunch certainly didn’t help (nor did their stock price losing almost 90 percent of its value in 2019).
Going back to Adam’s idea that retail’s in the driver’s seat, I imagine that would be true if you had 500 locations serving 40 million consumers. But that’s not what’s happening. It’s also easy to imagine a scenario where a high-speed manufacturer comes along, creates products for brands, gives them their own storefronts, and the entire center offers products 20 percent cheaper than traditional retail. The brand’s sole responsibility would be to promote and market, similar to an outlet mall.
A cannabis outlet mall? Is that doable?
Possibly. Someone will make it happen.
Where do you think cannabis in the Coachella Valley is headed?
Well, I don’t think Coachella Valley will be known for cultivation. When you think of where to grow, you think of Humboldt as the leader; you think Mendocino, Eureka, Emerald Triangle. It’s just too hot out here. We don’t have the right microclimates. You’ll start to see areas like Santa Barbara, Carpenteria as the next hot spots for cultivation, as they have the microclimates, similar to what the wineries need. I mean, if Temecula were to legalize, it would be a huge get.
Going back to Santa Barbara and Capenteria, they’re going to pull 50,000 to 100,000 pounds of harvest, but they’ll have nowhere to package it. If we were to handle the packaging for those companies, the valley will make revenues from the distribution. So we’re pushing for that.
I think extraction has a lot of promise. There’s opportunity in retail through innovative business models and to meet the consumer where they are. We’ll see an alignment, a maturing of the industry in 2020, and I think Growpacker is well positioned to take advantage of that.
So manufacturing’s gonna run the market?
Maybe. Manufacturing, distribution, sustainable brands, and retail innovation.