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New cannabis craft growers advised to follow craft beer model and specialize

· Nov 19, 2021
That was the advice that established dispensary pros dished out at a recent gathering of newly licensed entrepreneurs. With startup businesses aiming to create higher-quality specialty products ...

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Like craft brewers, craft cannabis growers can’t compete in size or price with established businesses in their industry, so they’d better stand out with unique products and strong partnerships.

That was the advice that established dispensary pros dished out at a recent gathering of newly licensed entrepreneurs. With startup businesses aiming to create higher-quality specialty products, the resulting industry should be more diverse, both in ownership and in the variety of products for consumers.

“You make a niche product that has a brand that tells a story that people can get behind,” said Gabriel Mendoza, executive vice president of operations for Mission Dispensaries. “Because you’re not going to be able to compete at cost ... it has to be something that people will buy irrespective of the price, to a certain extent.”

Examples of niche products include those marketed for specific desires such as relaxation, mood elevation and pain relief, or fast-acting edibles.

In an era of instant gratification, speakers said, customers are always looking for joints or vapes they can use immediately. Some are looking for a flight of pre-rolled joints, with differing strains.

Speakers also urged newcomers to consider forming partnerships with cannabis retail stores to ensure distribution of their products.

Cannabis attorney Cole Eastman, investor with Herban Garden craft growers, who attended the meeting, said new cultivators must make the most of special aspects of marijuana plants, such as terpenes and more obscure cannabinoids beyond the popular CBD (cannabidiol), like CBG (cannabigerol) or CBN (cannabinol), which are purported to have anti-anxiety and cell-protecting antioxidant properties.

“We craft growers really have to differentiate ourselves,” he said. “Being higher quality is the important part of it. It’s really going to force creativity on our part.”

The Illinois Craft Cannabis Growers Association held the meeting in October at a bar in Wicker Park for holders of craft grower business licenses that have been awarded since this summer by the state Department of Agriculture.

Unlike dispensary applicants, whose licenses are held up in court, state officials have declared 40 businesses eligible for craft grower licenses, plus additional licenses for infusers and transporters, following a competitive scoring process for lengthy and complicated applications.

Among those winners, state officials said, 67% were nonwhite, and 83% qualified as social equity applicants, meaning they lived in areas with low income or high rates of marijuana arrests, or who had low-level cannabis convictions or family members with a criminal record for pot. All the craft growers were majority owned by veterans, capitalizing on bonus points awarded for veteran owners.

Since getting their licenses, owners generally are in the process of trying to get financing to build out and open their businesses.

Under Illinois law, the state is also due to award another 60 craft grower and 60 infuser licenses by Dec. 21, while 185 new dispensary licenses are being held up in litigation.

The new craft growers face an uphill climb. They are limited by law to 5,000 square feet of growing space, a paltry area compared with the 210,000 square feet of canopy allowed for existing growers in the state. Big multistate companies also own multiple cultivation centers and up to 10 retail stores each in Illinois.

Speakers also urged marketing to store managers and budtenders, whom they said have more influence with customers at the point of sale than in most businesses, since customers often take their advice on what to buy.

Scott Redman, a regulatory attorney and part owner of Drecisco Farms, a majority Hispanic-owned craft grower and infuser planned in McHenry County, formed the growers association to represent licensed businesses.

As in other industries, supply chain issues are slowing down delivery of construction materials, further delaying owners from building their businesses, he said. Basic materials like roof trusses and concrete wall panels, frequently used by big builders such as Amazon, are in short supply, he said.

Another frustrating aspect of the business has been waiting for the state Department of Agriculture to advise businesses on how to get approval for various issues before opening. It took two months for Redman’s company to get approval to change from one empty site to another. “How can you plan if you don’t know what the state wants from you?” he asked.

For example, since submitting their applications 19 months ago, many applicants have lost principal officers, and the law requires state approval to replace them, Redman said. The act also allows a licensee to sell a license after Dec. 21, and many licensees need to sell equity in their business to raise capital to build and open the business, but Redman has seen no state guidance on those crucial issues.

Paul Magelli, head of the Illinois Craft Cannabis Association, which represents nonlicensed applicants for craft growers, infusers and transporters, said his group did a lot of research into craft beer as an analogy for cannabis newcomers. Craft beer’s success has been largely credited to better taste and more diversity and originality in its products.

“The majority of growth and much of the profits in brewing comes from craft beer today,” Magelli said. “It’s the sector of the industry that has vitality. We think there’s the same opportunity here. It’s not going to be easy, but there is a market segment that can be successful and sustained.”

To address startup issues, Chicago-based cannabis giant Cresco Labs also recently held a Zoom seminar for new craft growers, infusers and dispensary owners. Cresco helped 11 businesses apply for licenses, of which three were successful, and is offering $100,000 no-interest loans to the winners.

Chima Enyia, executive vice president of Cresco’s SEED social equity program, said the new entrepreneurs were advised to use the loan to secure additional resources to stack capital, meaning to find multiple sources of funding.

He encouraged “radical honesty” among partners to avoid disagreements later. For those selling ownership in their licenses after more than a year of state delays in awarding them, he suggested good attorneys and accountants to guard against predatory arrangements. With all the money investors have lost while waiting for state licensing, Enyia called it “a real concern” to keep business owners who want to stay in the industry.

Ali Jubelirer, co-founder of CannaMatch, which matches cannabis investors and license holders, said branding and packaging may help market to women, and many women are looking for lower-THC products such as beverages for relaxation and social occasions.

“That is a huge population that is underserved,” she said. “So there will be a huge opportunity for craft growers to get in on that segment that really hasn’t had a lot of attention.”

One new craft grower, Helios Labs, plans an open house Saturday to show plans for its building in Broadview. The 50,000-square-foot building is an empty warehouse, but President and CEO Ambrose Jackson plans to start construction before the end of the year to add new walls and heating, ventilation, air conditioning, electrical and lighting systems.

Through private investors, he said, his team has generated about $17 million to become operational. The team, with veteran Eric Ice-Gipson as majority owner, also has qualified for an infuser license and a dispensary license in Danville, and is working on a partnership with the owners of two other dispensaries.

Jackson wasn’t aware of any competitors that far along, adding, “We want to be the first social equity team to market.”

rmccoppin@chicagotribune.com