With respect to economies of scale being non existent in Cannabis, I agree with indoor, as that has proven out to be the case. Small grows can be just as efficient as huge grows.
But for a high tech greenhouse *on the coast of* southern california it appears to be a different story. Glasshouse has lowered their cost of production by about half in their first year of expansion, with a goal of $100 per pound (Graham Farrar recently doubled down on this goal, saying he thinks they'll get it below $100).
I know you have pointed out Sunniva as another company that tried and failed with a high tech glasshouse in Cathedral City, CA. And you've also pointed out that Canadian LPs have also tried and failed with large high tech greenhouses.
Cathedral City, CA Santa Barbara, CA
Weather averages Weather averages
MonthHigh / Low(°F) Rain days MonthHigh / Low(°F) Rain days
January70° / 47°2 days January65° / 45°5 days
February73° / 49°2 days February66° / 47°5 days
March80° / 54°1 day March67° / 49°5 days
April86° / 58°0 days April70° / 51°1 day
May94° / 65°0 days May70° / 53°0 days
June103° / 72°0 days June72° / 56°0 days
July108° / 80°0 days July76° / 59°0 days
August107° / 79°0 days August77° / 60°0 days
September101° / 74°0 days September76° / 59°0 days
October90° / 64°0 days October74° / 55°1 day
November78° / 53°0 days November70° / 49°2 days
December69° / 46°1 day December65° / 45°4 days
Sunniva was in the right state, but wrong region. Half the year the highs in their location are between 90 and 108 F, which is entirely too hot. From what I'm finding, they were aiming towards a cost per gram of $1.15 or about $520 per pound. I would imagine keeping things cool enough in the summer was an issue.
I don't need to post the weather for Edmonton (Aurora Sky's location) because everyone knows it gets entirely too cold for cannabis growing. From what I'm finding, they were aiming towards a cost per gram of $.75 or about $340 per pound. I would imagine keeping things warm enough in the winter was an issue.
So scale alone is not a meaningful competitive advantage, I'll agree with you on that.
But scale plus the perfect climate plus high tech greenhouse plus a lot of experience and talent does seem to be a meaningful competitve advantage. Unless Glasshouse is completely fabricating their numbers and Graham Farrar is being totally dishonest in saying they will get to $100/lb.
Speaking for me (Jerry) and not for the Bengal team at large, I am still skeptical of Glasshouse for a few reasons:
1. I think there's some questionable capital allocation as to whether right now is the right time to push more capacity in California (I've seen other maturing markets have "dead cat bounces" where it looks like pricing is coming back, then people flood back into the market pushing pricing down, etc.). I also am highly skeptical of the PLUS acquisition on the terms they got, and the performance of their CPG segment hasn't inspired confidence. If the stuff they sell is so good, why can't they seem to sell it inside of one of their own bags?
2. When it comes to the common stock, you're sitting behind a lot of debt and preferred that have very high vigs. I don't think asset value realistically protects you in a downside case.
3. Their COGS seems to go down, but their SG&A doesn't, which seems to tell me that they are having trouble finding that much operating leverage in the business. That said, the retail and CPG parts of the business obscure this number a bit, but somehow they seem to be selling at decent gross margins but not much cash is being generated.
4. Glasshouse is exposed to competition from decent outdoor. If you can grow it in a greenhouse, you can also at least sometimes grow decent stuff just outside. I see them potentially being squeezed at the bottom end of pricing by good outdoor.
5. I've tried to work through the economics of the business in my own private modeling and I just can't get to a place where it's that cheap without assuming something like interstate commerce, which is not something I'm willing to do to underwrite a base case for a company. With fairly favorable assumptions, I get to it costing about 10x earnings on a normalized basis, and I'm frankly more comfortable buying GTI at a 14x on fairly unfavorable assumptions.
So no, I don't think Graham or anyone else is being dishonest, but COGS isn't the be all end all here. That said, would be happy to see them do well as it would mean I think a pivot to health of the California market, which I think is an important thing going forward.
Jerry,
Thanks for sharing another write up.
With respect to economies of scale being non existent in Cannabis, I agree with indoor, as that has proven out to be the case. Small grows can be just as efficient as huge grows.
But for a high tech greenhouse *on the coast of* southern california it appears to be a different story. Glasshouse has lowered their cost of production by about half in their first year of expansion, with a goal of $100 per pound (Graham Farrar recently doubled down on this goal, saying he thinks they'll get it below $100).
I know you have pointed out Sunniva as another company that tried and failed with a high tech glasshouse in Cathedral City, CA. And you've also pointed out that Canadian LPs have also tried and failed with large high tech greenhouses.
Cathedral City, CA Santa Barbara, CA
Weather averages Weather averages
MonthHigh / Low(°F) Rain days MonthHigh / Low(°F) Rain days
January70° / 47°2 days January65° / 45°5 days
February73° / 49°2 days February66° / 47°5 days
March80° / 54°1 day March67° / 49°5 days
April86° / 58°0 days April70° / 51°1 day
May94° / 65°0 days May70° / 53°0 days
June103° / 72°0 days June72° / 56°0 days
July108° / 80°0 days July76° / 59°0 days
August107° / 79°0 days August77° / 60°0 days
September101° / 74°0 days September76° / 59°0 days
October90° / 64°0 days October74° / 55°1 day
November78° / 53°0 days November70° / 49°2 days
December69° / 46°1 day December65° / 45°4 days
Sunniva was in the right state, but wrong region. Half the year the highs in their location are between 90 and 108 F, which is entirely too hot. From what I'm finding, they were aiming towards a cost per gram of $1.15 or about $520 per pound. I would imagine keeping things cool enough in the summer was an issue.
I don't need to post the weather for Edmonton (Aurora Sky's location) because everyone knows it gets entirely too cold for cannabis growing. From what I'm finding, they were aiming towards a cost per gram of $.75 or about $340 per pound. I would imagine keeping things warm enough in the winter was an issue.
So scale alone is not a meaningful competitive advantage, I'll agree with you on that.
But scale plus the perfect climate plus high tech greenhouse plus a lot of experience and talent does seem to be a meaningful competitve advantage. Unless Glasshouse is completely fabricating their numbers and Graham Farrar is being totally dishonest in saying they will get to $100/lb.
Speaking for me (Jerry) and not for the Bengal team at large, I am still skeptical of Glasshouse for a few reasons:
1. I think there's some questionable capital allocation as to whether right now is the right time to push more capacity in California (I've seen other maturing markets have "dead cat bounces" where it looks like pricing is coming back, then people flood back into the market pushing pricing down, etc.). I also am highly skeptical of the PLUS acquisition on the terms they got, and the performance of their CPG segment hasn't inspired confidence. If the stuff they sell is so good, why can't they seem to sell it inside of one of their own bags?
2. When it comes to the common stock, you're sitting behind a lot of debt and preferred that have very high vigs. I don't think asset value realistically protects you in a downside case.
3. Their COGS seems to go down, but their SG&A doesn't, which seems to tell me that they are having trouble finding that much operating leverage in the business. That said, the retail and CPG parts of the business obscure this number a bit, but somehow they seem to be selling at decent gross margins but not much cash is being generated.
4. Glasshouse is exposed to competition from decent outdoor. If you can grow it in a greenhouse, you can also at least sometimes grow decent stuff just outside. I see them potentially being squeezed at the bottom end of pricing by good outdoor.
5. I've tried to work through the economics of the business in my own private modeling and I just can't get to a place where it's that cheap without assuming something like interstate commerce, which is not something I'm willing to do to underwrite a base case for a company. With fairly favorable assumptions, I get to it costing about 10x earnings on a normalized basis, and I'm frankly more comfortable buying GTI at a 14x on fairly unfavorable assumptions.
So no, I don't think Graham or anyone else is being dishonest, but COGS isn't the be all end all here. That said, would be happy to see them do well as it would mean I think a pivot to health of the California market, which I think is an important thing going forward.