January 2, 2019

Green Growth Brands Ltd (CNSX:GGB) Creating Vertically Branded Customer Experiences

Midas Letter
Midas Letter
Green Growth Brands Ltd (CNSX:GGB) Creating Vertically Branded Customer Experiences
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Green Growth Brands Ltd (CNSX:GGB) is positioning itself to be a cannabis branding juggernaut. CEO Peter Horvath emphasizes that the company’s leadership team has significant retail experience, which includes building internationally recognized brands like Victoria Secret, American Eagle, and Bath & Body Works. Horvath believes GGB’s strength is in creating vertical brands that control the entire customer experience. He believes cannabis will follow the direction of other industries that already use a vertically branded customer experience. Green Growth Brands is continuing its Nevada expansion, where it has licenses for 7 stores and is growing its operation in Massachusetts, where it is licensed for 3 shops. Horvath believes Green Growth Brands will be able to show profits immediately, and anticipates $250 million in revenue next year from its Nevada operations alone.

Transcript:

James West:   Peter, welcome to the show.

Peter Horvath: Thanks, James. Glad to be here.

James West:   Peter, Green Growth brands is a widely anticipated brand focused cannabis company entering the space. Tell me about your history with brands and branding, and why everybody is so excited about Green Growth Brands.

[stock_chart symbol=”GGB:CNX” align=”left” range=”1M”]

Peter Horvath: Well, I think what’s exciting is, look, let’s keep in mind, this market is evolving, right? First five million consumers, I’ll bet 60 percent of them were buying the product illegally. The next 4 million coming down the pike in the next five years, they’re not going to be like that; they’re going to be everybody else.

So it’s not about cannabis brands, and it’s not about cannabis consumers; it’s about brands and consumers, and that’s where we have deep experience. That’s where we’ve been working.

James West:   Okay. So the experience you have is in such household name brands like Victoria’s Secret, Designer Shoe Warehouse…what is the strategy that you’re going to bring from that universe into the cannabis brands? I mean, there’s some that looks obvious, but other stuff, I’m sure, is much more nuanced.

Peter Horvath: Well, I think the key thing is, look: everybody that’s entered the industry, they’ve come before us, they’ve kind of created the space that they can enter; they’ve been completely focused on product. Now as you know, as a consumer – by the way, you’re an expert in the field, because you’re a consumer.

James West:   I’m a consumer; I don’t know about expert.

Peter Horvath: But all consumers are experts ultimately, and you know, the people in this field have been focused on product, not on consumers. They’ve been focused in raising capital and getting quantity of product, then they are outsourcing the branding, packaging or the design of the store, and they might hire some people to come in and run the store for them.

But ultimately, our expertise at competing for customers in saturated and mature markets, and then winning them to the level of some of the brands you’ve mentioned where we’re number one in that segment, it’s about customer engagement. And you know, we’re in a game here not to, you know, just open stores, we’re in a game to earn loyal customers so that we’re reporting counts every year that are positive, so that we’re reporting EBITDA rates that go up over time as opposed to down. And ultimately, you know, ends up being a great investment if you’re involved in it.

So knowing consumers is what we do best, and then earning their loyalty through product and then management of channels and engagement is what we do best. And this isn’t a question of – I think a lot of the folks in this industry, you know, they’ve done a great job of getting launched, getting licenses, getting capital, and there’s a big question around ‘can they execute?’ We don’t have that question. We’ve executed, and we’ve delivered the number one lingerie brand in the world, we’ve delivered the number one personal products brand in the world in Bath and Body Works – very important, when we talk about CBD – and we’ve delivered the number one denim brand in North America, in American Eagle, as well as the number one shoe brand in North America, specialty shoe business in DSW.

So not only can we compete, but we can win. We’ve shown that.

James West:   Okay. So nobody’s going to really ask or be skeptical of your branding capability, however, it has been observed in the cannabis space that being able to execute on the actual product itself is key to developing a good brand. So I’m curious as to what is the strategy for Green Growth brands in terms of generating the product itself?

Peter Horvath: So I think the long term philosophy is, you’ve got to have, your supply chain matters. And it’s about building the right partnerships. And actually, what drive supply chain is your assortment architecture. I know this is going to sound complicated, but when you walk into a store and you experience assortment, the narrower it is, the easier it is for you to navigate. It’s just easier to figure out, what are these guys trying to sell me, and what should I buy? The narrower it is, the easier it is to train your associates. The narrower it is, I’m finally saying that clear, the easier it is to be in stock, and then the easier it is to develop meaningful sourcing relationships.

So whether you’re providing the product yourself, like I think we’ll be able to provide about half of the product in Nevada to ourselves , we could provide more but we want to stay diverse in terms of our sourcing base – basically, that architecture makes it easier to give long lead-time orders to cultivators and producers.

James West:   Sure. So you have production infrastructure already in Nevada to supply the –

Peter Horvath: Yes. The business that we closed on, the source in Nevada, it’s one store, a production facility, and a grow facility. The grow facility provides about a third of the product in the source store right now, as well as to the sister source store that we’ll be closing on soon, and they also wholesale. So the other 70 percent is wholesale too, like for example, Planet 13, you may have heard of them; so they’re wholesaling to them.

We have a second facility that I think we just announced this morning or earlier, that is expanded, it’s out in Pahrump, Nevada, has about 150,000 feet expansion of greenhouse hybrid. So we can do concentrates from there.

So excited about taking the knowledge that’s been demonstrated in the post facility that we got when we bought this property, then bringing it to this 8-acre complex that’s out there in Pahrump.

James West:   Okay. So currently we live in a universe where people are going to specialty stores where every product in the house is a cannabis product, and competing at that level in a concentrated brand environment where you’re competing with other brands in the space is one thing. But I’m curious about the evolution, where it’s federally legal to buy cannabis in, for example, Whole Foods, or Walgreens, and where you’re actually, no you’ve got your retail locations deciding which brands are going to represent.

Is that where your experience in, you know, developing brand competitive strategies excels?

Peter Horvath: I think we’re more – I have to really say, our strength is in vertical brands, where you control the entire customer experience. And that is what Victoria’s Secret is; you can’t buy Victoria’s Secret at Amazon, you can’t buy it at Walmart. You know, it is a true vertical brand. So there’s lots of ways to do this, okay? So being a brand that exists in other people’s stores is one way to do it. And we could to that, but our strength, we’d be foolish if we didn’t concentrate on our strength, which is delivering the entire customer experience.

Think about it: ten years ago, Apple pulled back from all the retailers and they launched their own stores, and then slowly, after they established some momentum in their own stores, they released their product to a few retailers. That was because they were so unhappy with the customer experience that was being delivered by other retailers.

Nike had thousands of retailers they were working with, and just a few years ago, they pulled back to just 40 because they were unhappy with what was being done with their brand. And keep in mind: when you push your brands out to thousands of stores, you don’t know what the product knowledge will be, you don’t know how it’s going to be presented, you don’t know if it’s going to be in stock – these are all the things that people hate about retail.

If they can’t figure out what it is you’re trying to sell, what does it cost, and why isn’t the one I ought three weeks ago here again, where’d it go?

James West:   Okay, interesting. So you’re going to focus on that entire brand experience in owned locations, owning the whole experience, the whole supply chain, the whole margin, more or less.

Peter Horvath: Well, and when we say ‘owning the whole supply chain’, let’s keep in mind the shift to a parallel. So vertical brands, they design the product, they have someone else go make it, it’s made in factories they don’t own, it comes from cotton that’s grown on a farm they don’t own – that’s probably where cannabis is growing, that basically somebody will be the expert at cultivating cannabis, and then you’re going to take your customer demand signals and translate them into direction for your cultivator in terms of ‘I need you to be making this’ and give it to them in a lead time that allows them to execute.

It’ll make it more profitable for them, because they’ll know what’s selling before they even plant the seeds.

James West:   Okay. So when do we actually get to see these wonderful stores?

Peter Horvath: So the exciting news is, I think last week we announced that we were expecting to get three licenses in Nevada, to take our footprint from one store to four. We were hoping we weren’t going to be disappointed. It turns out we got awarded seven licenses, which is awesome. We’re also working to close on the second source store, which had a different ownership structure. So we could be up to nine stores in Nevada, a total of nine, by September. That is $150 million, $200 million of revenue. Pretty exciting.

So the first two source stores, we’re going to leave them alone, because they have a wonderful loyal following, they’re well-run, we’re going to help them improve it even more. We’re going to introduce a Camp brand as well as a green lily brand which is for women. It’s basically, in this industry, no one has created a brand that is exclusively for women, or business. I’ve seen one, and it closed, by the way, it was up in Seattle; I think location, it was right next to the football stadium, probably not a great location for a women’s business.

But I think you’re going to see Camp stores popping up in Nevada, initially, Camp stores and it’s a brand were excited about. It resonates with people. It’s the idea of you’re going off glamping, if you will, and you let the battery in your phone die and you become present, and you’re really, you’re kind of like what cannabis does for you, you focus on the hear and now. You see the glow of the faces around the Campfire, the sparks going up to the sky, the stars in the sky, and realize, hey, those are there every night; I never look at them. And I think cannabis can give you that experience.

James West:   Yeah, absolutely.

Peter Horvath: So this brand is going to deliver it.

James West:   Oh, well that’s exciting. It’s rare to hear a CEO actually concentrate on the cannabis experience. Interesting. So starting in Nevada, then, during your IPO you raised $13 million, roughly $16 million Canadian. Sorry, that was a takeover. How much did you raise in total? How much do you need to profitability?

Peter Horvath:     We have pro formas like everybody else, and we’re showing a profit next year in those pro formas. But I gotta tell you, let’s get some of these stores open, and prove it. You know, we think, yeah, we think we’ll be a business that shows profits right from the beginning. I mean, honestly, look: the two source stores, one which we do not control right now but which I think we will in a matter of weeks, as well as the grow facilities, they’re trailing revenues; so, last 12 months, $39 million. The run rate is easily 45 million. The profitability of that operation, 20 to 30 percent EBITDA. So we immediately, right out of the box, have a business that is significant compared to all the other quarterly reports you just saw, and profitable.

So yes, the company we’re creating to do CBD does have some overhead, but I think we’re, you know, we’re not, we may be profitable already when we roll all these assets together.

By the way, I think you must have heard that we got a Massachusetts license? So there we go, there’s another three stores and a grow-op operation by the end of 2019 that’ll be generating revenue and profit.

James West:   Okay.

Peter Horvath: So I think we’re going to be a profit story right from the beginning.

James West:   Wow, that’s fantastic. All right, well, you know, that’s a great intro to the company. I’m a shareholder, I’m going to follow with the most acute interest imaginable, and we’ll have you back next time you’re in the city. Thanks for joining me today.

Peter Horvath: Great, thank you.

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